| Inflation, Ukraine military aid, OPEC+, and the Fed's balance sheet. Treasury Secretary Janet Yellen admitted Tuesday that she had been wrong last year in saying that inflation wouldn't pose a continuing problem. "I didn't fully understand" the unanticipated and large shocks stemming from supply bottlenecks, she told CNN. Meanwhile, Fed Atlanta President Raphael Bostic said his suggestion last week that the central bank take a September "pause" from raising interest rates shouldn't be construed as a "Fed put," or belief that the central bank would come to the rescue of markets. President Joe Biden said he'll give Ukraine advanced rocket systems and other US weaponry to better hit targets in its war with Russia, ramping up military support as the conflict drags into its fourth month. The package of weapons includes missiles that will allow Ukraine to strike locations as far as 80 kilometers away. World leaders including British Prime Minister Boris Johnson have publicly called for such a move in recent weeks.  | To the many reverberations from Russia's invasion of Ukraine, another might be an early end to the Organization of Petroleum Exporting Countries and allies' oil supply pact. The 23-nation alliance, led by Saudi Arabia and Russia, is due to finish restoring production halted during the pandemic by the end of September. The Wall Street Journal reported on Tuesday that OPEC is contemplating suspending Russia from the coalition's quota system, as sanctions prevent Moscow from increasing output. The Saudis and the United Arab Emirates might fill the resulting supply gap, the WSJ said. The Japanese yen is getting closer to 130 per dollar, as Treasury yields rise and the interest-rate differential between the US and Japan widens. This is combined with the plan to start shrinking the Federal Reserve balance sheet this month. An initial balance sheet run-off of $47.5 billion per month, and more Fed rate hikes ahead, make a compelling case for more yen weakness. In one corner of the market there's some evidence of dip-buyers in long dated Treasuries; whether that's part of a longer-term investment to pick up bonds offering a more generous yield, or alternatively a higher conviction that the bond market may recover from its significantly oversold status, is very much up for debate. The 9:45 a.m. Manufacturing PMI and 10 a.m. ISM Manufacturing releases for May are today's data highlights. We also get the MBA Mortgage Applications at 7 a.m. and the JOLTS Job Openings at 10 a.m. The Bank of Canada will announce their latest rate decision at 10 a.m., with a 50 basis point hike on the cards. Fedspeak includes John Williams, who will deliver opening remarks at an event on Monetary Policy Implementation at 11:30 a.m., with James Bullard set to discuss the economic and policy outlook at 1 p.m. The Fed's Beige Book will cross the wires at 2 p.m. Hewlett Packard Enterprise Co. and NetApp Inc. are among the companies scheduled to report earnings. Here's what caught our eye over the past 24 hours. One of the striking things about the tech downturn is that for the most part, it doesn't even seem to be about deteriorating fundamentals. The main thing that's going on, particularly on the private market side, is that VCs are telling their portfolio companies that access to future financing is far from guaranteed. And so all of these companies that produce no profit or free cash flow are facing an existential threat unless they can get to profitability soon. But anyway, I'll get back to that in a moment. According to Bloomberg analysis, there are 620 companies in the Russell 3000 that haven't earned enough income over the last 12 months to even pay their interest expenses. These companies often get referred to as "zombie companies" because the assumption is that they're basically only half alive, propped up by easy liquidity and loose money. There's always a lot of concern about the proliferation of these so-called zombies. But how come? Well presumably if a company can't even pay the interest on its debt, then it's not going to be viable as a real business without cheap money, and so presumably its resources could be better used elsewhere in the world. The proliferation of the zombies is seen as a threat to productivity, since the idea is that all of these assets would be better used by a company with real operations and a sound business model. You never hear about fast-growing tech companies referred to as zombies. But I think we should start referring to them as such for two reasons. 1) It's clear that a lot of these companies only exist due to abundant investment capital. Sure, most of these companies are financed by equity rounds, as opposed to debt, but that doesn't change much. They exist because of outside cash, and when the outside cash starts to dry up, they're suddenly thrust into crisis. 2) Unlike many of the standard-issue zombies, many of these startups really have been hoarding an extremely scarce resource: talent. Tech startups, and most recently crypto, have been this huge magnet for talent over the last decade. Employees in these industries have often made a fortune, despite working for companies that weren't able to turn a profit or even generate surplus value for the public. This has come with a cost. As Goldman's top metals strategist Nick Snowdon told us in a recent interview, one bottleneck to new mining projects is simply the lack of people who know how to build a mine. There's a shortage of mine engineers. And of course, that should surprise nobody. Over the last decade, how many smart, ambitious people went into resource extraction? Fast tech money was sitting right there for the taking. Now of course, we're facing huge deficits in key commodities (like copper) and though there are many reasons for it, one factor is the lack of fresh blood in the space. And it's not just about building new mines, but also improving the technology to make copper extraction faster, and more cost efficient. These things don't improve overnight. It would have been very nice, in retrospect, for the best and the brightest to be working on some of these problems over the last decade, instead of trying to get an algorithmic stablecoin to work If there is an upside to the tech wreck, then perhaps we could see the migration of talent move away from VC-funded money losers to working on some of the biggest challenges of our time. We can hope, anyway. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart | 
No comments:
Post a Comment