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No country for dear money

In times of zero or negative interest rates, waiting is for free. Whatever option you have in your hands is a free option, as your alternative yields nothing. As the economists say: “the opportunity cost is zero”.




Against this backdrop, the investment world experienced an era in which piling up options was a free lunch, as central banks pushed the rates pedal to the metal. Non-profitable US small-cap stocks skyrocketed, digital assets thrived, and conservative investors had to tighten their belts. This has dramatically changed now. The US Federal Reserve has embarked on a rigorous tightening cycle and the European Central Bank will follow suit. This has changed the value of options drastically. Markets started to discount this well ahead of the fact, so small-cap stocks have underperformed massively for months now. Feeling tempted to bottom-fish here? The bad news is that somebody else has already done so, for the related funds have issued new shares all the way as desperate investors have doubled down. No country for dear money, it seems.

Last week, liquidity fears spilled over into the digital assets space where some of the stablecoins completely denied their names and imploded. This ‘Lehman moment for digital assets’ hit the headlines, but the contagion was stopped before it turned Lehmanesque for the overall market. To us, this resembles another wave in the Darwinian selection process in the space, which makes it more resilient eventually.

Conclusion for investors

As for more global issues, the inflation frenzy seems to be cooling off at last. The US numbers rolled over last week, and we expect more to follow. Bond yields probably put in an intermediate high as well. Ironically, we are only now warming to inflation-linked bonds as real rates wake up from their two-year coma (see ‘Number of the week’). Turning to China, we still struggle with their policy mix and see this as a further burden to global growth. The focus is shifting from buoyant inflation to shortage of growth, it seems. More of ‘stag’ than ‘flation’ when it comes to ‘stagflation’.

Number of the week

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