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False Fears Redux

False Fears Redux

False Fears Redux

Volatility is healthy and normal in bull markets - it allows for expectations to be realigned, (i.e., lower) thus letting the bull market refresh, so it can grow stronger for longer. Breathe deep, hold tight, it's never a straight line up for capital markets.

Let's address some false fears garnering news headlines recently which led to softening of sentiment and possibly created downside volatility.

The reason we like to unearth false fears because it allows us the confidence to continue in our current course of actions, because once we have an understanding that a particular fear is false then we have to only hold tight to our current positions, and secondly as the markets digest the false fear and recover from it, we are well positioned to benefit from the recovery.

(We will debate politics in this note, so remember dear reader OneNorthStar is politically agnostic while a firm believer in Liberty and Pursuit of Happiness for all)

First on the list in no particular order:

Debt Ceiling: The specter of US Default due to the debt ceiling not being raised is blatantly false. One could fill up pages on why it's false. Consider data pts below:

  • The ceiling has been adjusted at least 110 times since its inception by Congress in 1939 yet we will continue to see grand standing and last-minute increases as in prior times, with sky is surely falling this time news reporting.
  • Also, the Supreme Court in past judgements has ruled that Debt servicing will be Treasury's prime focus (so taxes collected will be first used to pay interest on debt before funding any function of the Government), hence we will see a government shutdown first before actual default happens... if the ceiling for some political reason was not to be raised in the future (e.g., Dec 21).
  • Demand for Treasuries remains robust and the interest rates in the secondary markets are within typical ranges. If markets felt a possible default event, then spreads on them would have shot up significantly e.g., as they did for Argentina in past times.

Higher Interest Rates Are Bad for Growth/ Tech Stocks: Yes and No.

Yes, much higher long term interest rates are beneficial for Value stocks. No, we do not forecast higher long-term rates because rates are linked to inflation expectations always (i.e., higher inflation expected, higher rateslikely), inflationary pressures will alleviate as supply chain(s) get back to pre-pandemic levels efficiencies. Despite current goods and wage pressure, shortages are not of actual goods rather how to get them in a timely basis to folks who have ordered them (so ships, harbor's, trains and trucks are the issue, all supply chain pressure points).

As we have written before, we expect counter trends to Growth stocks leadership lasting several months yet the trend of Growth leading should stay until macro conditions change materially.

Global Energy Crunch: Sadly, this crunch is driven more by policy and political choices then actual shortages. Europe and the UK by government policy leaned on wind energy as an alternative energy source and now the lack of wind flows in the Continent is creating supply issues. Combined with a lorry driver shortage driven largely by Brexit and some panic buying by people is creating a perfect storm in energy prices as early winter arrives.

China in its desire to teach Australia a geopolitical lesson for its part in the defense pact with US and UK cut off imports of Australian coal and is looking to switch to Natural Gas (LNG) as a supply fuel. Both moves have not worked to its advantage. LNG switch over from coal has major teething issues and now its supply of coal is at an all-time low because it's not able to restock from its usual supplier (aka Australia) just when it needs it the most.

Dear reader you ask so what? Well, global recessions have been caused by lack of energy supplies or high energy prices and is a risk worth monitoring. We should see some relief in supply as the UK presses the Army lorry drivers to do restocking runs to gas stations and Germany will mostly delay closure of some coal and nuclear power stations, while China has ordered coal quotas to be exceeded.

On a side note, nuclear energy is an economical and a 'green' source of energy. (Did you know France gets 70+% of its energy via nuclear). More on that another time.

German Elections and Gridlock: Gridlock is good for capital markets especially in developed economies as it lowers legislative risks and favors more risk taking. Gridlock ensures no fresh re-distribution of societal wealth happens or no further impediments are created in the path of the entrepreneurs. (Legislation creates winners and losers artificially and the loser is never happy yet can find ways to side step the legislation hence blunting its impact, meanwhile the new legislation causes business slowdowns and disruptions which capital markets frown upon)

General Notes to you: Longer term (i.e., 3-24 months) macro-economic factors have not changed much. Output is high, demand is high. Interest rates are low (even negative in some countries, e.g., Japan), employment is high while politics stays gridlocked.

Growth and innovation abound across the globe, giving us confidence in our investing actions.

We did not add any graphs or charts of data in the interest of conciseness, that said any opinion expressed is partly data driven and we are happy to share that with you, just email and highlight any particular section of interest.

Our present course of staying invested and adding funds in the market is reasonable, the months/ years remaining of the current expansion are likely to be valuable from a return's viewpoint.

Together, we look eagerly to the future...

Warm Regards,
Team OneNorthStar



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NorthStar Portfolio Investments, LLC
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investments@onenorthstar.com
+1 203-343-0880


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