April 2022

“Maybe we printed too much money without thinking of the unintended consequences.” 

IMF Director Kristina Georgieva

 “Alchemy:  an ancient art whose practitioners sought to turn lead into gold.

Modern Monetary Theory: a current fad whose practitioners seek to turn slips of paper into prosperity.”

April was the month when the mountebanks who administer public policy finally said the quiet part out loud. “How could we be expected to know that printing too much paper money would lead to runaway inflation??”.  For that matter, “How could we know that shunting the global economy for two years would lead to serious supply/demand imbalances??”, and “How could we know that buying our oil and gas from a revanchist despot might backfire on us in a time of conflict??”.  Duh!!  What is the point of having experts in leading policy-making positions if they are going to ignore the basic lessons of history and economics?  Perhaps one day students will look at early 21st century monetary theorists with the same bemused ridicule we hold for the ancient alchemists.  In the meantime, don’t bet against the recycling of more 1970’s bromides such as “price and wage controls” and President Gerald Ford’s WIN buttons (Whip Inflation Now!) as viable options in the policy toolkit.

Volatility remained a feature of markets driven by continuing high inflation data and the first signs of economic slowdown as high input prices, Chinese lockdowns and the Ukraine conflict all started to bite.  The US economy actually slipped into negative growth for Q1, while labour markets remained fairly robust highlighting the imbalances building up.  Markets reacted badly, as growing calls for more aggressive rate hikes brought up the spectre of recession.  The SPX fell 8.8% while 10 year USTs backed up a further .60%, brushing up to levels not seen since 2018.  While not facing a similar monetary lift off, European markets remained focused on the economic fallout of higher energy prices and struggled as growth estimates were cut.   Importantly, interest rate markets moved very quickly to price in future hikes – perhaps too quickly – which contributed to the risk off mood.  We say too quickly because the resolve of the ECB to normalize the monetary environment is likely to be tested by slowing economies, and in a choice between protecting growth, which has been problematic for years, or fighting inflation, a recent plague whose insidious long-term effects have not yet been felt, we believe growth remains the dominant driver of policy in Europe.

All of this served to somewhat upend the conventional wisdom for financials in April.  Recall that higher rates translate to higher margins, which was the catalyst for the equity rally early in the year. But events in February created a risk-off market that more than wiped out those gains.  And credit markets, which had priced in a very aggressive hike path follow the ECB news that month now seem to be carrying excess risk premium, particularly in the shorter maturities. European financials reported strong results overall for 1Q, provided constructive guidance on rates’ impact and a confident tone about their ability to withstand the slowing economy, but valuations nevertheless suffered in April. The challenge remains that the overall market environment remains dominated by macro factors which are hazardous for risk assets.  And so we have continued with a very tactical approach to the portfolio; eschewing longer duration credit, limiting overall equity exposure and favouring securities in which we hold deep convictions.  However, in a market where flows and contagion risk can overwhelm strong fundamentals it is also important to be wary of signals and retain maximum flexibility.  That approach resulted in the funds A shares finishing up 0.05% for the month with equities’ gross performance at +44bps, compensating for credit at -35bps.