September 2021

“If you put the Federal Government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.” 

Milton Friedman

The limits of government intervention were on full display in September as yet another seventies moment came to life with an energy crisis.  However, unlike the original OPEC dominated crisis, this one is completely self-inflicted, with misguided policies executed in the name of “consumer protection” and “net zero” demonstrating the folly of government by shibboleth.  The details are well known.  European governments who actively sought to prematurely cut reliance on fossil fuel power now find themselves unable to guarantee adequate power for industrial and residential use this winter.  In addition to potential economic headwinds from disrupted supply chains the political risks of a heating fuel shortage will loom throughout the winter.  The UK went one step further with a gasoline shortage as well, as a tanker driver shortage led to a run on petrol stations and panic buying, a situation not yet fully resolved as October enters its second week.  Staff shortages also plagued numerous other industries and politicians were quick to lay blame on various sources, but one thing we’ve noted before in this column, the attempted cold reboot of a complex interconnected economic system that’s been turned off for 18 months will take some time to get back to optimum efficiency even before taking into account all the distortions that have been introduced with the best of intentions.

Elsewhere the markets were dominated by the Evergrande saga, with news of the Chinese property developer’s financial stress igniting long running concerns about Chinese corporate credit.  There was predictably much talk of “China’s Lehman moment” and a mid-month surge in volatility.  Elsewhere, the Fed confirmed that tapering of bond purchases would begin in November while admitting that inflation was proving to be less transitory than first believed as recent data – not just in the US – showed price increases running at twice the accepted maximum.  Ten-year Treasury yields backed up 17 basis points which sparked a selloff in tech stocks dragging the SPX down 4.7%, while European banks rose in response to higher rates with the SX7E rising over 3%.

Against this backdrop the fund’s A share were up 1.3% with 43% contributed from our equity holdings and 57% from fixed income. Looking forward into Q4 we are somewhat cautious about the near-term outlook; on the one hand a higher rate environment would generally be supportive for bank equities as NIM expands and loan demand grows.  On the other hand, a quick, sharp rise would be upsetting to broader risk markets that have benefited from ample, cheap stimulus in the last 18 months. With that in mind we are adopting a defensive posture to retain the flexibility to respond to developments as they take place.