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Morgan Stanley: Commodities Are at the Center Of 2021’s Most Important Stories

2021 has been a harder year for many investors than the headline indices imply…

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This article was originally published by Zero Hedge

Morgan Stanley: Commodities Find Themselves At The Center Of 2021's Most Important Stories

By Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley

Commodities Tie the Year Together

2021 has been a harder year for many investors than the headline indices imply. It’s been a year where ‘ESG’ and ‘Quant’ remain key structural trends in the investment community. And it’s been a year that has seen an almost constant, running debate over the outlook for growth and inflation. Commodities, it just so happens, find themselves at the center of all these stories.

Let’s start with the challenging year. The casual observer could be forgiven for thinking that 2021 has been a walk in the park, with global equities returning 16% through September 1, with historically low volatility.

But under the surface, it’s been hard. It’s been hard in a ‘good’ market like US equities, where major rotations have led to sharp swings in relative performance (US small caps rose +20% through mid-March, and are lower since). And it’s been hard in global equities, where MSCI China has fallen 26% since February 14, while MSCI Europe is up 14% over the same period. Many active managers are lagging their benchmarks.

Yet quantitatively, it may be an even harder year in rates and FX. We run a Cross-Asset Systematic Trading tool, or CAST, which aims to identify what factors matter for cross-asset performance, and systematically invest based on how those factors look at a given moment. CAST asks “if I do what has historically worked in the market, given current information, what should I do?”.

Year-to-date, following these historical patterns has led to poorer outcomes in interest rates and FX compared with all other asset classes. Where have historical patterns done better? Commodities. A lot better.

Investing systematically based on attractive factors (carry, momentum, valuation, supportive fundamentals) has been working better in commodities than any other asset class (credit is second). Why? We have a few theories:

  • Natural inefficiencies in the commodity market create risk premium.

  • The tendency of commodities to move in longer cycles means that momentum is more effective.

  • Central banks aren’t intervening in these markets (and investor flows have been more muted), allowing more ‘normal’ dynamics to play out.

Given the prominence of quant and systematic investing as themes in investment management, this is pretty important. To the extent one can, go where these types of strategies are working.

Commodities also tie into a second big investment theme, ESG. The underlying reality and seriousness of climate change remains constant, and indeed, looks even more pressing following the release from the Intergovernmental Panel on Climate Change (IPCC). Yet while ESG-linked equities have seen pronounced swings in 2021, commodity markets have delivered a far more consistent message.

The price for EU Carbon emissions, for example (MO1 Comdty), has risen 88% year-to-date. My colleague Robert Pulleyn has been bullish on the belief that a higher price on emissions is essential to meet the EU’s climate goals. Near term, he sees the risk of a decline given recent gains, before prices resume their upward trend toward €102/ton by 2027 (see Utilities: Carbon: Softness Risk Ahead? Before Upwards March Resumes, August 9, 2021).

Wait, you might say. If commodity markets are so focused on the realities of climate change, why are oil prices higher this year, not lower? Again, we think the market is actually pretty rational. Shareholder pressure and the threat of future EV adoption is causing oil producers to dramatically reduce their capex plans, a development that my colleague Martijn Rats believes will help limit supply and keep prices elevated (see Podcast | Thoughts on the Market: The Curious Case of Norway, EVs and Oil, September 2, 2021).

ESG and systematic investing are major industry themes. 2021 being harder than the headline indices suggest is something we’re all aware of. But the biggest story of the year is the debate around growth and inflation. What, it seems fair to say, do commodities have to say about that?

While commodity prices are often synonymous with inflation, our forecasts suggest they’ll now play a smaller role. The biggest downside risk to prices is likely to come from core goods (where demand has been well-above trend), while the biggest risk to the upside is likely to come from rental growth (which is a large share of the basket, and strong). Nonetheless, recent stabilization in commodity prices should reinforce the transitory nature of headline inflation, which our economists expect to moderate into mid-2022.

On the growth debate, however, commodities are front and center. Our economists see a 3Q slowdown in both the US and China (but not Europe, which is a story for another time). Copper prices and the CRB RIND index, two key harbingers of cyclical strength, remain high, consistent with a view that this economic weakness will be temporary.

We’ll be watching the resilience of these indicators as August data, reported in September, may look poor, and test the market's resolve.

Tyler Durden Sun, 09/05/2021 - 12:30

Economics

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States and is considered to be the most powerful financial institution in the world.
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The Federal Reserve, also often known as the Fed, is the central bank of the United States and is considered to be the most powerful financial institution in the world. The Federal Reserve was founded in 1913 to provide the US with a safe, flexible and stable monetary and financial system.

The purpose of a central bank is to create a financial institution that has privileged control over the production and distribution of money and credit for the nation or group of nations that it serves. Other examples of central banks include the Bank of England, the European Central Bank and the Swiss National Bank.

How the Federal Reserve works

The Federal Reserve is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the US. They are:

  • Federal Reserve Bank of Boston
  • Federal Reserve Bank of New York
  • Federal Reserve Bank of Philadelphia
  • Federal Reserve Bank of Cleveland
  • Federal Reserve Bank of Richmond
  • Federal Reserve Bank of Atlanta
  • Federal Reserve Bank of Chicago
  • Federal Reserve Bank of St. Louis
  • Federal Reserve Bank of Minneapolis
  • Federal Reserve Bank of Kansas City
  • Federal Reserve Bank of Dallas
  • Federal Reserve Bank of San Francisco

There are two main objectives of the Federal Reserve, to foster economic conditions that achieve stable prices and maximum sustainable employment. The duties of the Federal Reserve can be further categorized into four key areas:


The Federal Reserve was founded in response to the financial panic of 1907. Prior to its inception, the US was the only major financial power without a central bank.


  1. Conducting national monetary policy by influencing monetary and credit conditions in the US economy to ensure maximum employment, stable prices, and moderate long-term interest rates.
  2. Supervising and regulating banking institutions to ensure the safety of the US banking and financial system and to protect consumers’ credit rights.
  3. Maintaining financial system stability and containing systemic risk.
  4. Providing financial services, including a pivotal role in operating the national payments system, depository institutions, the US government, and foreign official institutions.

The organizational structure of the Federal Reserve consists of seven members on the Board of Governors. Each is nominated by the president and approved by the US Senate. A governor can only serve a maximum of 14 years on the board and their appointment is staggered by two years.

It is also dictated by law that appointments of governors must represent broad sectors of the US economy. In addition, each of the 12 Federal Reserve banks has its own president.

The Board of Governors are responsible for setting reserve requirements, the amount of money banks are required to hold to meet the demands of sudden withdrawals. They also set the discount rate, which is the interest rate the Federal Reserve charges on loans made to financial institutions and other commercial banks.

Central banks across the world play an important role in quantitative easing to expand private credit, lower interest rates and drive investment and commercial activity through FOMC decision making.

Quantitative easing is used to stimulate economies during periods of uncertainty such as recessions when credit is thin on the ground. An example of when quantitative easing was used was during and following the 2008 financial crisis.

Advantages of the Federal Reserve

The advantages of the Federal Reserve include:

Provides stability

During times of recession and periods of uncertainty, the Federal Reserve can help remove panic and provide help to financial institutions and their depositors in times of severe economic crisis.

Good risk containment system

The Federal Reserve regularly runs checks on the nation’s banks and financial institutions. It runs stress tests and reviews financial statements to make sure that the public is dealing with institutions that are in good financial standing, and are not overloaded with risk.

Disadvantages of the Federal Reserve

The disadvantages of the Federal Reserve include:

Not completely transparent

Many believe that private interest and lobby groups have significant influence over the Federal Reserve, allowing individuals to benefit rather than actions that benefit the whole society.

The post What is the Federal Reserve? appeared first on Value the Markets.

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Economics

What is Fundamental Analysis?

Fundamental analysis is a method that is used to measure a security’s intrinsic value by examining and analyzing related economic and financial factors.
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Fundamental analysis is a method that is used to measure a security’s intrinsic value by examining and analyzing related economic and financial factors. These can include macroeconomic factors such as the state of the economy and current industry conditions to microeconomic factors like how effectively a company is managed.

The purpose of fundamental analysis is to determine a number that investors can compare with a security’s current price to inform them whether it is overpriced or underpriced. Fundamental analysis is considered to contrast technical analysis which focusses on historical market data including price and volume.

How fundamental analysis works

Experienced fundamental analysts can identify buy or sell signals, calculate a security’s intrinsic value and assess factors that could impact the value of an asset.

Even at the most basic level, a fundamental analysis strategy will include the following primary factors to assess the security:

  • The structure and revenue of the company
  • Growth of revenue in recent years
  • Profit made by the company
  • The debt structure of the company
  • The company’s rate of turnover
  • Employee management and managements approach to employees

Fundamental analysis can help investors determine whether to buy or sell an asset by looking at public data.


Types of fundamental analysis

The fundamental variables used in fundamental analysis can be categorized in two ways: quantitative and qualitative.

Quantitative fundamentals

Quantitative fundamentals are typically any variables that can be measured or expressed in numbers. This type of fundamentals is useful if you are comparing securities in the same asset class or industry. Examples of qualitative fundamentals include P/E ratios, revenue and current liabilities – all of which can be found in a company’s financial statements.

Qualitative fundamentals

Qualitative fundamentals are anything that cannot be measured or expressed in numbers. These can include trends, a country’s media presence or a company’s board of directors. These factors are driven by opinion and can be harder to compare.

Although each requires a different approach, both are equally as important to complete a full analysis of a company’s share price.

The approach fundamental analysts can be either top-down or bottom-up. The top-down approach concentrates on the qualitative fundamentals first and then digs deeper into the numbers, whereas a bottom-up approach looks at the quantitative fundamentals first and then at the macroeconomic and microeconomic factors.

Advantages of fundamental analysis

The advantages of fundamental analysis include:

Detailed analysis

Fundamental analysis looks at both the financial performance of a company as well as other factors that could affect the value of its share gives a comprehensive and detailed analysis, enabling investors to make informed decisions.

Long-term benefits

This type of analysis can identify long-term opportunities for investors as it considers multiple areas that can impact the stocks and securities value.

Can highlight early warnings

Undertaking fundamental analysis can highlight early warnings and provide insights into the effect of fiscal and monetary policy and the direction of global markets.

Disadvantages of fundamental analysis

The disadvantages of fundamental analysis include:

Can be time-consuming

The process of conducting fundamental analysis can be time-consuming. As a detailed method of analysis, it involves a variety of approaches that can take more time than other analytical methods.

Missed opportunities

Following on from the previous point, the amount of time fundamental analysis takes could lead to missed opportunities where an investor needs to make a quick investment decision. In these instances, investors should look at alternative analysis methods.

Subjective analysis

As this method of analysis considers all the micro and macro factors together and analyzes them simultaneously, it can become complicated and subjective. Placing a numerical value against different factors will usually be a combination of experience and personal biases.

The post What is Fundamental Analysis? appeared first on Value the Markets.

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Economics

“We Should Be Concerned” – The War On Cash Is A Real Thing

"We Should Be Concerned" – The War On Cash Is A Real Thing

Authored by Bruce Wilds via Advancing Time blog,

In our bizarre economy, we hear…

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"We Should Be Concerned" - The War On Cash Is A Real Thing

Authored by Bruce Wilds via Advancing Time blog,

In our bizarre economy, we hear many things, and ideas are constantly being thrown out to us. This all tends to flow together and help us develop a strategy as to how we should cope with the changing times. One thing we continue to hear is that a war is being waged to eliminate cash. Not only are most people going along with this but many have embraced the notion. 

Some people view carrying cash as dangerous or burdensome. This also dovetails with their desire to spend more than they can afford, when using a credit card it is far easier to continue spending money you do not have. All things considered, when asked, is the war on cash a real thing being directed from those on high, sadly we must answer yes. Cash reflects "options for the people" and it appears those in charge of such things want in gone.

Currencies were developed to facilitate and ease transactions between individuals and businesses. The war on cash is simply another way Washington can continue to show its favoritism towards big business. Small businesses often rely more on small cash transactions and often lack the ability to process other forms of payment. It is ironic that while big businesses and companies like Amazon flourish with each move government makes, the small businesses on Main Street are left worse off.

Your Wealth Will Be Locked In A Computer

A cashless society where records are made and kept reflecting every transaction we make even down to buying a candy bar also allows the government to monitor our every move. This is something Big Brother-type governments strongly aspire to under the guise it will extend its ability to protect us or tamp down on crime, tax evasion, and corruption. For some reason, they seem to think this will allow them to collect more taxes, yet it comes at the same time they continue to tilt the tax code in favor of massive companies.

The way the government has handled coins during the pandemic is a clear indication of its unconcern over the role cash plays in our economy. When coin shortages developed, little or no effort to straighten out the mess was instituted. Considering the massive number of coins sitting unused in jars and cans across America it is a situation that could easily be resolved. In fact, coinage has yet to return to full use following the pandemic, and claims of coin shortages persist.

This Is Far Too Common

Another place this "war on cash" is showing its head is that as of July 1st my bank started to charge a "cash handling fee" of 13 cents per hundred dollars. Simply put, banks want and feel they are in a position to charge customers for the "inconvenience" of having their employees handle cash.

Let me be clear, banks, saving accounts, and other vehicles designed to hold cash are paying little or nothing in the way of interest. With the numbers just out that the CPI is up for the 15th straight month, cash is under assault.  this reflects the fourth straight month above 5% on a year-over-year basis.

While this is the first time the month-over-month CPI has come in below expectations since November 2020 that is not something worthy of celebration. The CPI is routinely criticized for understating and not accurately portraying the true rate of inflation. Another issue is this could be merely the Delta variant's impact creating the illusion inflation is not rising as rapidly as some people think.

We Should Be Concerned

Inflation, currency debasement, and a slew of other problems have always haunted those holding fiat currencies. This does not mean placing your wealth into one of the new cryptocurrencies is the solution. It does not help that in our world where everything seems to be manipulated, central bankers and their ilk all seem to be moving in the same direction. The masses are trapped in a box and the sides are slowly being moved inward.

Because central banks must keep a lot of liquidity in the system in order to keep it functioning, we have the potential of reaching the place where we drown in paper money and inflation soars. This would signify the end of this war on cash and that cash had lost. It is difficult to justify leaving your wealth in cash that is rapidly losing its value. As we stare into the face of rising inflation and possibly lower negative interest rates the reality that all fiat currencies are in trouble and this is just one big Ponzi scheme becomes very apparent.

How fast events unfold is impossible to predict. Just as important is the order in which the four major currencies fail. We have good reason to be concerned about this because it has the potential to strip us of our wealth and cause major disruptions throughout society. Until then, which may be years away, cash has value and plays a very important part in our lives.

Tyler Durden Thu, 09/16/2021 - 05:00
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