October 10, 2022
Notable
- Ukraine bombs the 12-mile Kerch Strait Bridge, a key logistics route for Russian forces in the Crimea.
- Russia launches cruise missiles against more than 20 Ukrainian cities — including the capital of Kiev — in retaliation for the bridge bombing.
- Bank of England (BOE) will continue rate hikes but will take other actions to safeguard pension plans, which were at risk after gilts and the sterling (UK bonds and the pound) crashed two weeks ago.
- CPI, CPI, CPI! To be announced on Thursday.
- Earnings season begins this week.
As my annoying cousin would say over and over when he was 3… “but why?”
Bombs and missiles. The Ukraine and Russia continued to escalate their war as the former bombed a Russian bridge and the latter launched missiles against Ukraine’s capital city of Kiev. I’m no expert in Russian roads/logistics so I can’t judge how damaging the bridge bombing was to Russian war efforts, but a missile attack on 20 cities clearly shows that Russia isn’t taking this lightly. You know what they say, “Never bring a knife to a gun fight.” Some have suggested that Russia has been holding back its full military strength. If so, perhaps the bridge was a tipping point?
Rhetoric on both sides has been escalating as well.
Even though gilts (UK bonds) and the sterling (UK pound) crashed a couple weeks ago, the BOE still plans to hike rates. [cue ominous organ music] You’ll recall that rate hikes are bad for the market. However, the BOE also plans to buy bonds (and do other complicated finance stuff) to try to keep UK pension plans out of trouble. UK pensions have been using what is known as Liability Driven Investments (LDI). This is a fancy way of saying the pension plans need to do complicated investing (betting?) to make up for the fact that they’re going to run out of money…eventually. These LDI’s get affected a lot by interest rates and inflation, and you’ll recall that when Truss announced huge tax cuts, bond yields went bazonkers. Inflation was already bazonkers. All of a sudden, those LDI’s were causing all kinds of default trouble for the pension plans and to maintain solvency (cover their bets) they were going to have to sell a ton of assets which could, in a worst-case scenario, cause massive crashes world-wide. Sort of like what happened here when people were tearing toilets and copper pipes out of their houses that they could no longer afford. Contagion…like a pandemic but for money.
CPI! Consumer Price Index! This is a measure of the monthly change in prices that US consumers (“consumers” — see how that works?) pay. It breaks down spending in all kinds of boring categories, but in the end it’s basically a measure of inflation. When the CPI goes up? More inflation. Down? Less inflation. This number is probably the most important number all week, even more than your daughter’s SAT score. Why? The Fed, silly! It’s always the right answer! Even for your daughter! If her SAT essay question says, “Write an essay in which you explain how Adam B. Summers builds an argument to persuade his audience that plastic shopping bags should not be banned,” the answer is because the Fed says so. Um.
The expectations (which we know is what matters) is that year-over-year (YOY) inflation is expected to go up to 6.5% from 6.3%. If it goes up more than that? The Fed gets out the paddle, and the markets get spanked.
Earnings season begins next week. If you’re a total noob to anything stock market related, I’ll just tell you that earnings season is a quarterly phenomenon (That means four times per year. It has nothing to do with this game.) in which companies report (exaggerate) how much money they made, how much they think they’ll make (with their fingers crossed behind their backs) in the future, and how any bad news related to them (it wasn’t our fault and it’s already fixed) doesn’t matter. Recently, the Fed and inflation and other boring stuff have been the big drivers of the market, but these corporate lies may slide behind the steering wheel for a while.