Ep.48: Why US Yields Are Important & Trending Stories This Week (Bitcoin, GameStop, OPEC, Fed, EVs)

Okay, very good morning. It's Friday the 7th of January, and a happy new year to everyone. Piers, how's your Christmas and New Year?

Uh, well, happy new year. Yeah, good. Well, yeah, COVID impacted.

Oh yeah, you missed your holiday, right?

Yeah, I mean, I live in, um, well, the epicenter of global Omicron, I think, in the, um Southwest London. I live in Southwest London. So I live in like Balham, Wandsworth, and these boroughs, or the Wandsworth borough, I think was actually, yes, the number one in the country in terms of Omicron cases. So yeah, we got nobbled. We were going to go on holiday, but my son got COVID 5 days before we were leaving. So you know, but these things happen. So we knuckled down.

Question on that though, your son got it. Did the rest of your family get it?

Well, this is the weird thing. I mean, he, so, you know, he was isolating in our house, you know, roughly, but I would say he probably almost certainly had it 24 hours before we knew he had it. And in those 24 hours we were together and mingling and yeah, none of us got it other than him. I mean, we did PCR tests. I did a PCR test, I did a couple, 3 actually, all negative. But I don't know, I mean, obviously, well, not obviously, I got boosted. Must have been a month before, right? Or a few weeks before at least. And I don't know whether I got it, but it was just so mild that I had no symptoms and tests didn't pick it up, or whether I just didn't get it at all. I don't know. But, um, anyway, he definitely got it, and that meant we were— yeah, no traveling for us, which was highly annoying.

But, you know, yeah, there was a friend of mine said he bought his brother the Meta new Oculus headset. They were all sharing it around, and then his two brothers had COVID. It just so happened then they were positive day after, but he didn't, he didn't catch it either, even though they were sharing the VR headset. Yeah, so go figure. But, but I don't think—

I actually don't think my son had Omicron. I think, I think he— well, I don't know what— I, I presume he had Delta. But what happens is, um, if you go for PCR tests and you have to wait then to— if it's positive, you wait then another day and they, they, they contact you if it is Omicron. And then there are more— well, there used to be more strict quarantining, uh, sorry, isolation rules for close contacts if it's Omicron versus Delta or whatever. We didn't get recontacted, so I presume he had Delta, which maybe is, of course, less transmissible.

But, but, you know, okay, well, look, I mean, you missing your holiday aside, yeah, I hope everyone obviously is safe and sound and managed to at least spend some time with their nearest and dearest. And, uh, yeah, I mean, look, onwards and upwards, 2022 now. So this Week in Markets has been Pretty interesting, actually. Normally it takes it a little bit of time for it to warm up, as per most people returning to work, I think, the first week of January. But let me give you— well, how we're going to do this podcast is I'm going to go over and run through some of the highlights of the week, part one. And Piers, feel free to interject and add some flavor if you feel necessary on any of these subjects. And then the second part, perhaps the more meaty part of the conversation, We're going to talk about US yields. You've probably read about that a lot, um, certainly if you've been following, uh, financial news. But why is that important? What's triggering that move? And what's the repercussions for things like tech stocks, growth stocks, all of which been seeing some pretty sizable price movement this week? So kicking things off then, starting with the beginning of the week, we actually saw, uh, before we actually moved lower towards the end of the week, Apple they briefly rose above $3 trillion. Market cap at that point, index weighting peers in the S&P, what do you reckon?

What percentage of the S&P is accounted for by Apple?

Do you mean?

Yeah. It's got to be— God, that's a good question. I'm going to— 5%.

7. Now 7%.

Yeah. Why?

Just unreal. Yeah. I mean, it's not as unreal as Tesla's share price. It went up 15% at the open first day of trade this year, and then it fell 17% pretty much the subsequent days after. And now, do you know where it is from where we closed at the end of 2021? Percentage change?

It's probably up. Zero. Oh, it's flat.

It hasn't moved.

Right.

It's just had a 20% either way shift up, down. I mean, it's just crazy.

I mean, I love it. That big pop higher was based off its 2021 unit deliveries, wasn't it? Which got up to— it wasn't even a million, was it? 900,000?

That's right. Yeah.

Yeah. And I will put that into context again. I've done it many times on this podcast. People who listen to this regularly will know my views on Tesla. But yeah, so up 15% based off the fact they produced 900-odd thousand, which was higher than what analysts were forecasting, and hence why that was that little pop. But that's still less than one-tenth of the unit production that the big car giants like the Volkswagens of this world produce. So yeah, I just find it quite funny that people go, oh my God, 950,000 cars. Wow, that's amazing. When actually it's still nothing in the grand scheme of things.

Yeah. And that EV race is heating up quickly. I think it was GM CEO's come out. They've got the whole range basically coming out electrified with their new 4x4, which is the rival for the Ford F-150, which is like the— it's just a pickup truck you always see in the States. But that's like their big seller. And they've got the smaller hatchback version of one of their models. So the price ranging from like $30,000 for a pretty decent car, fully electric. And that definitely is going to be hard to compete with because I guess their manufacturing is just so much matured. As you said, the distribution model is so much more efficient.

Well, this is why the Rivians of this world, which is an electric truck, this is why now their share price, I think you were telling me earlier, it's down below their IPO price now, right?

Yeah. Yeah. So Rivian, interesting one. So they were down about 20% yesterday. They dropped below their IPO price. They're trading below that now. And so Amazon, who obviously have backed Rivian, I can't remember their holdings, like 20% or something like that. And they had that jumbo order, didn't they, of—

That's right.

—them out of vans. So basically Amazon, I think, have got impatient, which doesn't say a lot about Rivian. And Amazon have announced a deal with Stellantis, which is basically the Fiat Chrysler Peugeot hookup for electric van. Yeah, I mean, it looks terrible, but I mean, you're delivering parcels, so it doesn't really matter. But basically Amazon have gone, you know what, we're just going to get our vans from there. And they haven't really said what that means to Rivian. And Rivian obviously, yeah, they've got hit on that.

Well, here's the thing, I mean, this is the thing about the Rivians of this world, it's, you know, that they can't mass-produce cars.

But Fiat Chrysler can, and Peugeot can.

Exactly. So that's their big risk for these newcomers to this market. The big risk is the big giants all move to electric, which obviously they are. And they've already got all the infrastructure, and they've got the track record, and the experience in mass production. And all right, fine, that one, it might not look very good, but it's much easier to change the design of of a vehicle than it is to figure out how to build it.

So, so yeah. Yeah. Well, then the other thing at the beginning of the week was, I think it was the first trading day where you were seeing these record high cases of the Omicron spread, the dominant strain now. Record numbers, UK, France, Italy. I mean, the French numbers have been super high. US as well, topped a million on a day. Yeah, and budget airline stocks, London listed, um, were loving life. I mean, they were up double-digit percentage, um, so they saw some pretty decent gains at the beginning of the week. So not to go into it on this particular one, we've talked about it before, about the more kind of mild symptoms associated with Omicron not requiring then the same kind of stringent lockdown, so therefore air travel can maintain and so on. So moving away from that then into Boris Johnson's announcement, which kind of fits within the same, was he said the UK could weather a record wave of COVID-19. We are seeing that record wave right now without tighter restrictions. So I know you and I talked about this briefly the other day. Boris played this well in the end or just got lucky? I mean, he is a lucky politician, some would say. Well, look, I mean, I—

this is the classic, isn't it, with politicians. Obviously people have very polarized opinions about any single politician. And I think that this is a really good example where if you take away all political bias entirely, which I know is not really possible, but let's try and pretend, then in December, Boris had a shocking December, if you remember, with all the scandal around the partying that was going on at Downing Street in the kind of first lockdown back in 2020 and so on, and the Christmas parties and whatever. You know, he then, you know, he had a clear strategy based on the idea that Omicron was not going to be, you know, as severe a disease as like previous strains. And look, he got it right. Let's not kind of beat around the bush. He definitely got it spot on. And this does carry quite, you know, very meaningful positive outcomes for the economy. Not implementing more stricter restrictions definitely has a positive return on economic activity. And now, all right, you could say he got lucky, but the early data was always that it looks like this is going to be a milder strain. I know it was always based on early data, so everyone's caveating that with but it's early days yet, so we need to wait and see. But I think he's always said, we'll make decisions based on the data. And even though it was early data, that was the data. So you make a decision based on that. And he's got it right. I just kind of find it quite amusing that no one's— not many people in this country are willing to say the words that Boris got it right, or well done, Boris. Obviously, the media are certainly not going to come out and celebrate his decision. Now they're looking for the next negative thing that they can print about him. But that's obviously the nature of being a leader. Everyone's trying to pull you down a peg or two. But look, I think he got it spot on. And obviously, this is what's going on at markets. And I think even though you're getting a million cases in the US, such a just unbelievable figure, but doesn't matter. And it doesn't matter because the UK is the case study. Proper case study. I know this strain came out of South Africa, but the UK is the proper case study for is Omicron a serious risk or not. And as the weeks tick by, it's more and more and more clear that it's not a serious risk. And then people are really going beyond that and saying, well, actually, is this the beginning of the end of this pandemic? Is it a cycle? And this is what the scientists were saying way back in 2020, but no one really knew what the hell they were talking about because it was so new— pandemics— and we weren't used to them, certainly not in the West. And it was that idea that you're going to get new strains, you're going to get multiple waves, and actually, as these new strains, you know, evolve, they may become more transmissible, but they tend to become weaker in terms of their severity. And it looks like this Omicron actually in the end is a good signal that that cycle is playing out, and therefore maybe, you know, we're in that final phase of lockdowns, you know, globally, and that maybe by the time we go through next winter, you know, perhaps we won't have any economic impacts at all or marginal impacts.

And that view I guess is going to play a part for our discussion in a moment about yield movement and the Fed to a certain extent. So we'll discuss that in a moment. Just going through the other list of other hot topics that have emerged this week. Bitcoin, it's— I mean, the crypto space has been suffering with this yield movement. In fact, it's been really since that has been initiated and the Fed have got hawkish, Bitcoin's been suffering. I think we're off about 40% or zero from the November highs. All the other space is falling. Ethereum, I think, fell more than Bitcoin at points during this week. That's obviously been the one that's been talked about a lot with the technology and adoption going forward with the whole metaverse conversation and so forth. Another one to throw in the mix is happy anniversary, GameStop. The share's up 30% last night. Um, and it wasn't just because it's their anniversary. They've— I mean, you've got to love the— is it the anniversary, like, bang on? I haven't checked, but I'm pretty sure it was close, right at the beginning of the year. It's close to— yeah. Um, but yeah, you've got to love their strategy to just really, you know, live the moment. And they've come out and basically, I think they've employed— it's like a tiny team, but it's caused a 30% reaction. I think their team that are creating this NFT marketplace for GameStop is 20 people. And the shares have gone up 30%. It's just insane. And they're looking at establishing cryptocurrency partnerships and things like that. But yeah, the crypto space having a bit of a rough ride. And it's been quite interesting. There was Goldman's out at the beginning of the week banging the 100K drum. They were talking about the 5-year picture and about the store of value and taking more market share from gold in that play, which— okay. But yeah, 5 years, $100K Bitcoin. Yeah. I don't fancy that myself. Yeah. That's not a big call to make, I don't think. Yeah.

I'm underwhelmed by that call from— the guy's name's Pandl, who's Goldman's crypto analyst. I don't know how many crypto analysts, Goldmans have these days, but actually it's a good indication of generally what's been an increased adoption of crypto by institutional investors through 2021, let's say. And I think that's actually what's playing out. Now, I think you're seeing a stronger correlation now between, let's just say, Bitcoin and things like the S&P 500. There's a stronger correlation, I think, because there's more institutional players in Bitcoin now. And so you're seeing when you're getting a rotation of assets, and that's what creates these correlations, right? Is when big institutional players who've got the big capital are moving money from one asset to another, then you're getting that inverse correlation because they've got such power, they're moving markets, right? And I think certainly Bitcoin and obviously generally the crypto space, Bitcoin lower, maybe because of that institutional side, and then that, of course, is bringing all other cryptos down with it scenario. I think you are seeing better correlations now with Bitcoin and the trad fi assets. But yeah, as to whether Bitcoin's going to be the new gold, I think there's some rationale that makes sense around that. Idea. I think it will be a very slow transition. But I think that Goldman's guy, his assumption was based on— he says, yeah, Bitcoin's going to hit $100,000 if Bitcoin's share of the store of value market— so what he means there is that gold is a store of value, which is one of the reasons people own it. So that market, where do you put your money if it's safe and I want to protect it against inflation? So it's an inflation hedge. Then he's saying people are going to move more into Bitcoin rather than gold. If 50% of the market becomes Bitcoin, then he reckons it'll get to $100,000. I don't— I mean, if Bitcoin managed to get 50% of the store of value mark, I mean, it's going to be way higher than $100,000, I would suggest. I'm a bit confused by this guy Pandol at Goldman's. I'm underwhelmed by his his piece that you put out, to be quite honest.

Yeah. I mean, just looking at Bitcoin now, it's technically at quite an interesting level at around $41,000, which was the SEP low before the big push-up that we saw through October. And that was also the June, July peak as well. And I guess this afternoon, we're recording this prior to payrolls coming out, but let's say hypothetically payroll headlines expected at 400K, I think the unemployment rate, 4.1. What if we get a 1 million employment figure and a 3.9 unemployment rate? Bitcoin, what's next? 36,000, I guess, which is that July, June top that we saw, late June and July point of support, but 30K. Raoul Pal Yeah.

I mean, the big— Right, exactly. That's what I was going to say. The big The big technical support, if this big selloff continues, is definitely around the $30K mark, which is basically the 2021 double bottom, let's call it, from February and then again in mid— well, around the July area. But I mean, that would be more than a 50% selloff then if you get down to $30,000. I know that sounds like a lot, but look, Bitcoin's been through plenty of 50% plus sell-offs in the past. I would expect 30,000 is my opinion. I mean, I think we'll talk about inflation a bit more in detail, but I think if this inflation concern carries on, which it probably will in the near term, then yeah, pushing these cryptos down further, I think is probably to be expected. So Yeah, if you get down to $30,000, then that's really interesting to see if that support holds, and it may well do, but, um, that's a massive level, and you know how sensitive, um, crypto is to technical levels. It's still, it's still very influenced by the kind of technical side of things, and, you know, a break of $30,000, I mean, you're going to get some serious freefall. I mean, you might— well, I don't want to speculate too far on the downside at this point. But yeah, I'm still looking lower for crypto, is my personal opinion, as this inflation—

I know you'll be sniffing around when it's down at $30K. I'll be certainly— Sizing in at $30K, a little bit more at $25K, and then you're fully in at $20K.

I'll be certainly interested when we get down to those levels. But to be honest, would I be interested in Bitcoin? Probably not. I think Bitcoin's now the sort of— when you start talking about it being the new gold, then it starts to get a bit dull. I mean, is there really— I think the other crypto, more infantile crypto would carry greater upside potential, but there's more risk because you're obviously— the more infantile you go, the more risk there is as to whether or not that's a genuine coin that's going to actually make it you know, in the kind of medium term.

But yeah, and anyone listening who's trading these cryptos, remember diversification. Oh yes, absolutely.

And never ever invest more money than you can afford to lose. Yeah. All right, my big advice.

Yeah, on that point of advice, let's move on. Some of the other things then for— from the week. Oil prices, pretty decent move actually in WTI front month futures. We're trading back above $80. So the Omicron dip, take it back. We're right back where we were, probably and some at this point. And why is that happening at the moment? Well, this week we had the OPEC meeting. No real surprises. It certainly wasn't as interesting as the month prior. So they're sticking to their plan, increasing output 400,000 barrels a day. In February. So they always have a meeting to plan for the output for the month ahead. They've continued adding now supply every month, um, since August. And some of the rationale particularly that's played in— it wasn't so much the OPEC meeting this week, that was very much as expected. It's more about just what's going on. So we talked a little bit about the general comfortable nature markets have now with the Omicron spread. So that's helping a little bit on the demand side. On the supply side, there's been quite a few independent things, one being weather. So whenever you're trading or monitoring an energy product, weather is integral component of price dynamics, if you like. And what we've had there is a deep freeze in Canada and northern US disrupting oil flows. I'm not sure if you saw— I don't actually know if payrolls is coming out in the regular fashion. You remember over the years, Piers, when payrolls actually is a manual type release rather than automated because staff can't get in at the Bureau of Labor Statistics because the snow is that deep. Um, wouldn't be surprised that happens again. That was always a disaster for me to report. So to give a bit of context, so I'd be there, right? There's people like Piers times a couple of thousands of them waiting for me to say this figure when it comes out. But normally it's as easy as just reading a terminal and it— the number pops up. But when it's weather disrupted Basically, they update the BLS website. And so every man and his dog is hitting F5 refresh as fast as they can. And obviously it crashes the server. Then the website goes down. And then people like Piers shout at me going, analyst, analyst. And I'm like, F5, F5, F5.

Oh, those are the days.

Yeah. So yeah, good, good job I'm not covering those anymore. But, um, but yeah, so, so we've got pretty bad weather in North America, parts of pockets of North America. But then Libya's production is still down 30%, um, amid militia unrest. And then OPEC+ member Kazakhstan's giant Tenghez oil field temporarily adjusted amid unrest we're seeing. You've probably read about that to a certain degree this week. So that's the oil thing. Um, and then moving on The final one I thought to mention is back in the EV space. One, Sony. So there's like an— I think it's electronic consumer conference that they have every year. And there's lots of cool stuff that gets announced. I must stress, this isn't to go into production tomorrow. You can't rock into your GameStop shop where you buy your PlayStation and say, I'll take an electronic vehicle as well, please, while you're at it. Um, but Sony have launched Sony Mobility, which is a dedicated new company that will focus on electric vehicles. Have you seen the pictures of them? I have, yeah. What do you reckon?

Uh, looks— well, looks much better than a Tesla.

Looks— I was gonna say the same, looks way more plush than the Tesla. Yeah, looks a bit more upmarket. It's a much more— I mean, I think it was the SUV one, because actually I think it was a V2 model that they were talking about this time, right? But yes, it looks good. It could be quite interesting. Um, it's so funny how I think it— I always think it's old dinosaurs like us where we're quite anchored to certain auto manufacturers. And it's interesting how I think as a young person that you can throw out, like, the idea to me of driving a Sony car, it's like, you're ridiculous. That is your initial emotive reaction. But for a young person, it's like, why not? I mean, yeah, I spent all my time using this product. Yeah, you know, I actually, I live in this product, or I soon will do. Yeah, as far as the next 10 years is concerned. It's interesting talking to someone about VR the other day, and we were kind of talking about when is the metaverse truly going to take off, because there's a lot of barriers through infrastructure and technology for one, but that aside, just the behavioral adoption of it into the broader space. Actually, it's the kids who are in the Roblox at the moment who are like 10. When they're 21, when they're 30, when they've got real consumer purchase power and they're buying high-value goods, but we're talking 10, 15 years down the track, 20 years down the track, Um, but yeah, it will be, it will be interesting nonetheless.

But this kind of, this Sony thing, I mean, look, brand, uh, brand awareness or brand loyalty or, you know, comfort and familiarity with a brand can only get you so far in the EV game because the very, very harsh reality of trying to build EVs on scale will just smash you in the face at some point. Now, there are plenty of companies— we did an EV section pre-Christmas, but Dyson is another— all right, perhaps not quite as sexy a brand as Sony amongst the youth.

Yeah, you'd be a Dyson car buyer, wouldn't you, Piers?

You'd be down all day. Dyson are a fantastic company, incredibly innovative. Phenomenal success. And they attempted an EV. They went down the EV route and quickly reversed and said, "Right, let's stop that. That's not economically viable." I think Sony, if they actually— because they've been a bit vague about it. If they actually come out and say, "We are properly going for this. We are going to manufacture our own EV." If they come out and say that, I think that'll be very negative for their share price. I know that their share price bounced 4.5% off the back of this news, but was it that news? I mean, they're on this kind of Spider-Man wave at the moment with the huge success of the Spider-Man movie over the festive period. But firstly, well, I think this is the Sony strategy. And don't forget, they launched a kind of an EV prototype 2 years ago. So this isn't brand new, come out of left field, out of the blue, by the way. Even though a lot of people think it is. Um, they really launched it 2 years ago and it hasn't really gone anywhere, and that's because they actually supply, or want to and have ambitions of supplying, a huge amount of, um, devices and batteries and sensors for electric vehicles. Not necessarily for their own vehicle, but for other manufacturers' vehicles. So certainly, like, think about entertainment devices that can be plugged in you know, to, to improve that immersive kind of vehicle experience, right? So that's what Sony are all about. That's what they should stick to. That's where they've got the edge. That's where they can manufacture this stuff. And it's— I, I hope this is a ploy where they're going, look, we're going to launch an EV, which is actually just a big PR marketing strategy to show that they got some seriously cool stuff that can go into EVs that then makes other manufacturers more aware of that. And I hope that they go down that path, or at the, you know, at the most they kind of outsource the manufacturing to someone who knows what they're doing. Um, so maybe some kind of strategic partnership. I hope they go there, and then that could be interesting. I think if they go, right, we're going to build this ourselves, I just think it's going to be a waste of a lot of time and money.

Well, one thing I was writing about, um, earlier this week, and it might be— it might actually be a something you're aware of but not many of our listeners are aware of, and it ties us back into your favorite company Tesla again. And that is Friendster, the social networking site. Did you ever use Friendster?

Well, obviously that's got something to do with Friends, the TV show, I assume. No, no. Friendster. Yeah, I've never ever heard of it.

Okay, so, so Friendster in the early noughties was the hottest social networking ticket in town. Wasn't it like—

was that like MySpace? It was a year before MySpace. Ah, right.

Okay. Let alone Facebook. I mean, this thing was ahead of its time.

Pre-Facebook. Yeah. Right.

So I was talking about this in context of EVs in a newsletter I wrote. So Friendster, right? First to market, massive adoption. Originally, I think they did 3 million users in the first month or something, and it was like the talk of the town. Do you know what their biggest reason for failure ended up being? Go on. Reliability.

Right.

And the consumer, uh, report that came out for all auto manufacturers at the end of 2021, do you know where Tesla ranked out of 28 auto manufacturers?

What, in terms of reliability?

Yep.

Um, bottom half, 27.

So you don't actually know who was worse? I mean, I don't actually know who was bottom.

Wow. Can you get worse?

I don't even know. Um, that's incredible. Well, I mean, it's just, it's interesting because, because now that I've been tracking these GM models that have been coming out And Volvo have got their new one coming out, Polestar, Polestar, that's coming out. And it's like, yeah, these are serious outfits who've been doing this for decades, hundreds of years, if not centuries. Yeah, if you're talking about other large ones like Toyota and people like that. So yeah, it's going to be interesting for sure. I mean, I'm not talking now Tesla short term. Can they go higher? Sure, they can go higher. Yeah, I was— I finished the piece saying, look, Tesla might win a win the race. Yeah, but they might not necessarily win the championship, right? Like, so we'll see how it ends. But look, um, yeah, well, the final, final piece of car news, um, that I have for you is BMW's new color-changing paint technology. And if you haven't seen that, go to my Twitter handle— shameless self-plug— @awmchung. And I put like a GIF where you can see it. And the car just kind of mirages into black and white. It looks pretty cool. But essentially what this is, is they've got surface coating on the car that contains millions of microcapsules. They're about the kind of width of your hair, basically. So super small. And each of these microcapsules contains negatively charged white pigments positively charged black pigments. So you can set then a stimulation of electrical pulses through the car and it can go from black to white. Now, as gimmicky as that sounds, that the rationale of the technology is that actually there's a degree of car heating efficiency depending on white reflective, um, nature of the color or black absorption. Yeah. And so forth. So yeah, I just thought that was It's pretty cool if you want to.

So basically you've got— so it's white, black, or 50 shades of gray in between. Is that, is that the idea?

Well, for guys like you, maybe. Yeah, yeah, I think that's pretty cool. I like it. Yeah, it's just interesting how, like, there seems to be quite a bit going on now. But, um, but let's talk about the main story of the week, and perhaps I thought you could deconstruct this a little bit for me and for the audience, which is US yields. And I guess starting that, because that's been the main focal point for market participants. But why US yields? Why are they important? Why are they such a cornerstone for all assets outside of fixed income?

Yeah, I mean, US yields. So this is, this is basically the return you get on owning US bonds. Okay. Now we often talk about this thing called— well, it's not quite risk-free return, but what's the closest you can get to risk-free return? It's owning an asset where the risk associated with that asset is as close to zero as you can get, right? So really safe kind of assets like US government bonds. Okay, US government bonds are considered to be safe because the risk of the US defaulting, many would say, is incredibly fantastically small chance of that. Okay, you could argue that the chance of that has gone up as a result of COVID along with the chance of most governments defaulting going up just because of the debt load that they've taken on to fight this crisis. But look, put that to a side, right? US debt is incredibly low risk. Investors like— it's about risk versus return. Everyone's heard of that kind of trade-off. If you can take a small amount of risk and generate a high amount of return, that's your ultimate sort of thing to find. But of course, it's not possible. You can't get low risk and high return. US yields have been fantastically low, record-ever lows for years and years and years now. Okay. So that means that the return you get for owning US bonds is super low. And so low, it's actually negative. It's a negative return in terms of real yields. So we talk about real yield, which is the difference between inflation and the yield on the bond. So if you put $100— if you buy $100 worth of US bonds and they're yielding at 1.5%, and let's just say inflation's at 3%, I mean, it's higher than that at the moment, but let's just go with 3%, right? Then you've got a negative real yield. Because even though your bond is paying you 1.5% interest, the value of your money is dropping by 3% per year because of inflation. So actually, net-net, you're losing 1.5%. Per year on the value of your money. Okay. So not only have we had yields super low, we've also had high inflation now for a period. And so you're getting negative yields. So people are forced to move their money into other assets, more risky assets. This is what we call the hunt for yield. One key reason as to why the S&P 500 and some of these big giant tech stocks— it's one of the key reasons why they've been super strong is because that's where investors are putting their money. They're taking more risk by buying stocks, but they're big guns. So you might think that the risk associated with Apple is super low, right? Because it's such a mature company. So people are forced into buying, let's say, stocks or buying other bonds who have a higher risk. So they might buy emerging market bonds where there's a much higher risk of default, but with that you get a higher return. OK? So that's kind of how it's all played out in recent years. But what's gone on in the last few weeks— and I'd put more on that— the last few months in terms of US bond yields, certainly we kind of bottomed out at the start of December. US bond yields were about 1.35%. Now they're 1.7% plus, right? So actually, all of a sudden, you've had a sharp increase in US bond yields. So actually— This now makes that lower-risk asset more interesting from a return point of view. The return you get for owning US bonds has gone up. So this is where people are going, well, okay, hang on. Why should I own really high-risk assets to generate my return when actually now I can get a decent return again from this safer stuff? So you're seeing people sell some of that higher-risk stuff in favor of maybe returning back to a safe place of US bonds.

And so what, more evident then and would explain why the NASDAQ growth tech stocks have suffered more so this week than some of the other sectors?

Yeah, what's happened this week in stocks is really interesting because, fine, if you're looking at stock indices, you're going, okay, well, they've come down. But actually, if you kind of delve below that, you've seen a really interesting sector rotation, and certain sectors have done really well. And I would say what's happening is you're getting people moving their money out of what my friend Hany Redder referred to as spec tech. So he was quoted in the FT this week talking about spec tech, which is speculative technology, which is basically tech stocks that aren't profitable yet. So like the Rivians of this world, right? Where basically all of their current value, that's the share price today, all of that current value is based on future potential earnings. Okay, but all of a sudden now those future potential earnings are getting devalued in today's money. This is to do with inflation. We'll hook this to the Fed in a minute, but when inflation's really high, the value of money drops. So basically the value of those future earnings in today's money is dropping because of inflation staying higher for longer. So even though you've got on the one hand, hang on, Omicron's not going to impact the recovery, we're going to get a cyclical economic recovery, people are selling these spec tech stocks because of inflation, and where they're rotating their money into more— into cyclicals. So still on the higher risk end of the equity spectrum, into cyclicals, but cyclicals that aren't sensitive to inflation and higher interest rates. Such as banks, for example. Banks have done pretty well so far in the first few days of the year, and things like industrials have done well. Okay. So these are companies that benefit from an economic upturn, but aren't hurt as much by higher interest rates or higher inflation. And in fact, banks, that's a good thing for banks actually. So you've seen this interesting rotation. So really banks, industrials, and energy have done well, and that's, I think, function of course the oil price.

So that's why yields are important. That's how then it starts to impact stock sectors and asset class movement. But what's the catalyst? So we've had a couple of things this week, particularly around the Fed and the Fed minutes, which actually were a big surprise, which is unusual. So if you're not used to the format. Basically, the Federal Reserve released minutes, like, oh, 2 weeks after their initial discussions that they have to set policy. And normally, 2 weeks in the world of financial markets is like a lifetime. And so minutes are left redundant and not very often they yield any type of surprise, but these ones did. And the reason why is because they were hawkish. And the Federal Reserve officials said, strengthening economy and higher inflation could lead to earlier and faster interest rate increases than previously expected. Some policymakers also favoring starting to shrink the balance sheet soon after. So there's two parts of this then. There's the timing of rate liftoff and number of hikes, and then there's the shrinkage of the balance sheet. That probably needs a little bit of explanation on the what are these, and what's the sequence, and why is it then that those two factors are influencing this yield move?

Yeah. Well, look, in terms of a tightening cycle— so that's when the whole period where the central bank is tightening. If we look back, often— not often, pretty much all the time, investors, we look back, what happened in the past? And let's assume a similar kind of— let's assume the pattern repeats. This is human behavior. And then the way we bet, or the way we act, if we assume it's going to repeat, our actions in terms of buying and selling assets really kind of in some ways makes it repeat. But look, what happened last time in terms of the Fed's tightening cycle? I mean, firstly, they wind down quantitative easing, which is what they're doing now. But they're just winding it down way faster than they have done before. So normally, they wind down quantitative easing, then they wait. They might wait 3 months. They might wait 6 months just to see— once you've stopped QE, that's it. There's no more stimulus. So just how does the economy and how do markets deal with that? And if it's fine and it's settled, OK, now let's start raising interest rates. OK? Then they might start raising interest rates and raising rates. And if you go back to like 2016, 2017, 2018, they were raising rates, raising rates, raising rates. And I think they were raising rates for— it was probably— you'll correct me if I'm wrong— maybe 2 years. Before then, they started to what's called— they started what we call quantitative tightening, which is actually then reversing the increase in the money supply. Okay, so that's— so normally that's the sequence. It's steady, very slow and very steady, and making sure markets are okay with it before they move on to the next phase. But I think what's happened this week, and really what's happened over the last 2 months, is that all of a sudden the Fed have just decided to go on hyper speed with regards to this tightening cycle. So they've sped up the reduction of QE. We're now pricing in rates starting to go up in March. So just as QE ends, it's hike rates straight away. And now we're talking about quantitative tightening starting next year as well. I mean, it's literally like— yeah, it's literally like a tightening cycle on hyperspeed. And then— so what are we to take from all of that? Well, we're to take that. I mean, there's only one way to take it. And that's the Fed are panicking. They're panicking about inflation. And they're panicking that it's actually way higher than they thought. And more than that, they're worried it's out of control. I mean, why else would they be just suddenly smashing the accelerator in a way I've never seen? So this is why markets are then panicking a bit. In terms of stocks, let's say, for example, that are sensitive to inflation, like those spec techs. Right? So that's what's going on right now.

Yeah. The other thing that's quite interesting is obviously it's a new year, and that means a new set of members on the Federal Open Market Committee. Actually, I was looking at this this morning, and Bullard is now a voter. And he's like the outlying hawk. He was speaking last night, fueling the fire on this, this topic. Waller, who's the second most hawkish, he's now a voter. George— Esther George is, who formerly was the most hawkish, is a voter. Harker, voter. So actually, of the 5 most hawkish possible members of all of the FOMC, vote or non-vote, um, out of the 5, 4 now have voting rights, right? Yeah, this year of the regional presidents. Yeah, interesting.

But you still got to balance that off though. You still do have Powell, who's very dovish, and Brainard. So the, the, the chair and the vice chair— yeah, are the superpowers.

Yeah. How much do you think— we keep— we kept seeing this in 2021 where normally it's coronavirus related that something would happen, the market would over-interpret and get super aggressive in its pricing only to wheel it back in. Is this week— I mean, how do you see this week's reaction? It's a big move that's happened.

It's a massive move. I mean, I want to say it's an overreaction. I want to say that we're not— I think 2021, for a large part of that year, we underplayed our inflation expectations. I think we're now overplaying them, but we have to talk about China at least briefly, because that is one of the critical uncertainties around everything. And that's particularly on the inflation side, but also on the supply chain side, which plays into inflation, also on the global economic sort of momentum, because China is still operating on this zero tolerance COVID policy. And if Omicron kind of squeezes and gets out there, and we see a lot more kind of big city lockdowns, then we've got a problem. On the one hand, because then you might think, right, global supply chains are going to get squeezed again. And actually, that's really inflationary. And so that's maybe one thing the Fed are worried about. So on the one hand, it's what's China's policy going to be towards COVID? And it's quite interesting to look at their calendar this year. It's an incredibly important year. But early on in the year, we've obviously got things like the Lunar New Year coming start of February. You've got the Winter Olympics in February in Beijing. And this is a global event. And we know how China play this if they've got the world's media and the eyes of the world on them because there's some kind of global event happening there, then they want to make sure that it's what the picture that they are painting of their nation is the best it can possibly be. So there's certainly going to be zero tolerance COVID until at least after the Winter Olympics, right? But just after the Winter Olympics in March, you then get the the National People's Congress, which is their annual political meeting. And so some are saying maybe during that meeting, they'll go, right, let's now, we've got past the Olympics, let's now just kind of relax a little bit. But there's one big outlier, which is the big uncertainty. In November, it's the National Party Congress, which is the once in every 5 years Congress, and this is massive because this is the, the moment where Xi Jinping may well be— were expected to be given a third, unprecedented third term. So for Xi Jinping, that November conference is— it's, you could argue, the biggest moment in his life, and maybe, you know, hugely influential on the way that China gets run for decades, years to come. Some people are saying, well, given the importance of that November meeting, it may be that China operate with zero tolerance throughout the whole year until after that meeting, in which case we may well see these global supply chain issues getting disrupted again, which is I think one of the reasons the Fed are just preferring to be a bit more hawkish here, whilst that uncertainty plays out. But there is quite an interesting counterargument to all of this. I mean, one side is, well, companies are better prepared now because they've realized the risk with global— let's call it the global supply chain risk. If you're a US company, you've seen firsthand the damage that can be done by being reliant on a global supply chain where you're sourcing products from, let's say, Southeast Asia, you've had your hands, fingers burnt over COVID, right? Because you haven't been able to get these products. And actually, people have forgotten all about the US-China trade war. It was pre-COVID. And actually, so that risk really materialized then, 2018, 2019. So you've had a few years now where companies have been trying to start move their supply chain risk.

And on that point, with the party congress you mentioned, plus US midterms, that friction is going to get worse, right? Right. Yep, absolutely.

So look, companies are looking to move, and, but that's not an easy thing to move, you know, your supply chain. But they're looking at, you know, other— there's a few options, right? They could go to other Southeast Asian countries like Vietnam or Malaysia, for example, or maybe even India, right? But there The infrastructure is nowhere near as good as China. So you've got infrastructure risk coming in. You could stay in China but move more internally into the country where labor costs are cheaper, and you've still got good infrastructure. But of course, then all your eggs are still in the China basket. So you're not really reducing your supply chain risk particularly there. So others are looking then to move away from Asia. And you might think like, so— companies like Turkey— sorry, countries like Turkey or Morocco might be interesting, or Eastern Europe might be interesting for European countries. But the big winner out of all of this is Mexico, where you're seeing a lot of US firms— how are they dealing with this global Southeast Asia supply chain risk? Well, let's just shift it all to Mexico. But as I say, it takes years to get all this— your factories built, and all this infrastructure in place. So it's happening. But look, the point is it's too early yet. Definitely companies are still very reliant on China production. But there's one other thing, right? If China still have zero tolerance, then what happens is the trade surplus stays very high. So this is where they're exporting a lot of stuff, 'cause the world's coming out of COVID and buying stuff, but internally, internal consumption is damaged because of lockdowns. So the surplus stays really high. Now the problem with that is China want to maintain their peg, the renminbi peg to the dollar. If the dollar's strengthening because of a super hawkish Fed, then really the renminbi, if they want to maintain the peg, they're going to have to be buying dollars or or dollar-denominated assets, right? So if the surplus stays wide, they're buying dollar-denominated assets, which is US government bonds. So if they're having to buy US government bonds in huge quantities because of their zero-COVID lockdown and their big surplus, then this actually means bond prices go up and yields come down. So ironically, it could be that this economic risk in China and zero-COVID tolerance actually leads to bond yields staying depressed. Depressed, which then in turn is really good for your spec tech and your cyclical stocks. So even though China's a really big risk, if you go one derivative on, that risk actually can be spun in a positive way for things like US tech stocks. So yeah, China's a big risk. That's the big outlier for me in 2022. What happens in China. Cool.

Well, look, we'll— some really fascinating points there, and I think really eloquently deconstructed as ever by the master himself. So, um, any questions at all that you ever have for us, by the way, uh, on anything that we discuss, just shoot us an email. Um, you can email me directly, a.chung, C-H-E-U-N-G, at amplifytrading.com. Happy to also get your feedback on, on the pods and, and anything you want to hear about in the future as well. Um, again, just to conclude things then, if you're new to listening, really appreciate it if you could follow or subscribe depending on your platform. If you're on Apple, drop us a rating and review, really helps get it out to as many people as possible. I hope you found this episode interesting, and yeah, thank you, Piers, as ever, and I'll see everyone next week.

Yep, have a good weekend.