by Ivan Martchev

June 15, 2021

The stock and bond markets have taken the view that inflation is “transitory,” as the headline CPI rose 5% (year-over-year) in May and the 10-year Treasury market celebrated the inflation news by sending yields down to 1.44%. I briefly discussed this situation with a bond trader who has been specializing in cash bonds for the past 40 years. He seemed perplexed. He thought Treasuries would move towards 1.77% (the 2021 highs) or higher, as the economy was getting hotter. Real interest rates need to rise, but they haven’t.

US Inflation Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

My response was that the German/eurozone and Japanese money rates could be helping the Treasury market. German bund and Japanese JGB yields have been near zero for five years. If we have rising inflation globally, it stands to reason that investors are better off in Treasures (in a currency hedged basis) than in near zero-yielding bonds that suffer under the yoke of yield curve control in Japan or Europe.

Those bond yields didn’t go to zero by themselves. Japan’s central bank and the ECB pushed them there.

Germany Govt Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Plus, a financial institution does not really care as much about whether the 10-year Treasury yield is negative after inflation as if the 2-10 spread is positive. As long as short-term rates are way below long-term rates in the U.S., that’s a positive carry trade, and a bank can make money by borrowing short and lending long. It’s those that buy and hold Treasuries that will lose money after inflation, not the banks.

US Central Bank Blalance Sheet

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

All that drama in the Treasury market resulted in a bid in the technology sector, which is a stone’s throw away from an all-time high, if one looks at the Nasdaq Composite. If bond yields are well behaved and don’t rise over the summer, we could see more gains in the technology sector, but that is a very big “if.”

All it takes is a firmer hint of “tapering” from the Federal Reserve, which is probably overdue, to blow up the bullish case for technology, despite the good earnings expected in the sector.

Cry for Argentina (and Maybe Russia)

At the Money Show in Orlando last week, I spoke to a value investor who wanted my opinion of Argentine and Russian equities, since many were trading at discounts to book value.

“They are trading at discounts for a reason, in both cases,” was my short answer.

Argentinian Peso Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Argentina is a basket case of macroeconomic mismanagement – for over 100 years. Their leaders have bastardized the Argentine peso too many times to count, followed by surges of high inflation every time the peso collapses. The same peso that was at parity to the dollar in 2002 now trades at 95-to-1.

“That is why Argentine stocks trade at deep discounts to book value,” I told my questioner.

Every time they elect a pragmatist that tries to fix the macroeconomic problems, a Peronist opponent takes him down (as was the case with Macri), and then the peso bastardization process begins again.

Is there any wonder why Argentine companies trade at deep discounts to book value?

At least Argentina is not as bad as Venezuela, which is another case of macroeconomic mismanagement.

As for Russia, love him or hate him, Mr. Putin does a good job of managing the Russian economy from a macroeconomic perspective, but he does not care about enduring any short-term pain for long-term gain.

I would bet that Russia was probably planning to retake Crimea long before Putin took power, as Crimea was never really Ukrainian territory. The 1953 reform of the Soviet Union transferred Crimea from the Russian SSR to the Ukrainian SSR as they never envisioned that the Soviet Union would break apart.

The Russians felt threatened from Ukraine joining NATO and the EU, making Ukraine a chokehold on 50% of Gazprom’s export volumes that go through that country, so if Russia feels they have to annex Donetsk and Luhansk, I think they will do it. They may not stop until they get to Kharkiv, then on to Odessa. Right now, they are trying to fix the situation diplomatically, but I am convinced that should they conclude that diplomacy won’t work, violence in Ukraine will flare up again.

Pro-Russian Unrest in Eastern Ukraine Map Image

From this brief analysis, I believe discounts to book value for Russian equities will remain, at least until sanctions on Russia are lifted and the Ukrainian issue is resolved peacefully in Russia’s favor.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Inflation Continues to Surge at Fastest Pace Since 2008 (or 1992)

Income Mail by Bryan Perry
G-7 Bulls in A China Shop

Growth Mail by Gary Alexander
“Nice Work If You Can Get It

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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