Crowded Trade

Good Morning Ladies and Gentlemen,

When everything seems so obvious, you want to reconsider.

Potentially Crowded Trade

Sometimes things seem so obvious, «the really smart» people point in one direction, media and social media confirm the view, the trade looks very promising, you are convinced to outsmart the market. Ladies and Gentlemen, a good trade may begin like this, a bad trade as well.

Base Effect

Over the last twelve months, inflation increased steeply, driven by a base effect of higher commodity and energy prices. While I believe a similar increase cannot be expected for this year, a look at the long-term charts, including the core rate (excluding food and energy), shows clearly that U.S. inflation has reached the breadth of the U.S. economy. On the other side, inflation has not (maybe not yet) reached the core area in the Eurozone. Moreover, although energy prices were rising, the core inflation rate even fell slightly in the Eurozone.

Crude Oil

Crude oil plays a significant part in the energy price equation. Yesterday, the WTI spot price hit USD 91.64; this morning, March futures are trading slightly below USD 90. As a trader, whose market comments we follow regularly, pointed out to us, looking at August delivery, prices go down to USD 83.24 already, and whoever can wait until December buys the barrel at USD 79.90. The point I want to make is that if crude oil plays a significant part in the energy price equation and the rise in energy prices led to a base effect that fuelled inflation; the opposite may come true as well.

What if

What if, in the same time frame, supply chain problems recede somewhat and freight rate prices for container ships ease similarly to those for bulk container ships? Would we not see inflation rates come back?

Bond Short

Moreover, if inflation rates come back slightly, maybe the Federal Reserve would refrain from increasing the U.S. base rate six times by 0.25% in 2022 as it is currently priced in by the market, and this Ladies and Gentlemen would be a surprise to market participants. Today’s speculation still goes as far as 12 increases.

Now, to me, «short bonds» is a crowded trade, and I would keep my fingers off! Currently, the trade looks still so obvious. Too obvious, I think, this is why one wants to reconsider. Once market participants change their inflation outlook slightly and predict a minor lower inflation picture for the end of the year, a forced covering of a short position in the bond market (in any market really) may lead to losses.

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth

Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li