The 'SOFR first day' and More

1. Monday marked the 'SOFR first day'- it implies that from today SOFR becomes the key rate in the interbank swap market. This is a great step toward the LIBOR cessation. The shift will see SOFR replace Libor as the floating leg on all linear swaps, swap spreads and curve trades in the interdealer market.

2. Chinese stock markets saw the maximum capital inflows in 2020, everything was going good until regulators took this ride too seriously, and denounced such an upheaval, and this led to wiping out all 2021 gains in just 4 days, and Tencent losing $170 billion in this rout.

3. Signs of shortages and excess demand abound in ways not seen since the double-digit inflation of the 1970s. Purchasing managers’ surveys show that delivery time delays have stretched to levels typically seen only in high-inflation environments.

4. So this time it is supply constrained inflation. Inflation was considered transitory as the Fed considered that the companies could quickly replenish their inventories, but it seems like companies are not able to keep up the demand surge. A growing number of companies are reporting declining stores.

5. We are in a position only seen back in World War 2 and late 1940s. Treasury rates are near 0, and inflation and nominal growth is peaking to record levels. This clearly goes to show that quantitative easing is fueling the deficits.

6. I see these 4 main undercurrents in international policy:

   1. Nations preferring self sufficiency in production of critical goods

   2. Accelerating race in the technological leadership

   3. Urgent need to fix the demand supply grapple.

7. So, what investment opportunities do such developments bring?

   1. Companies, tech and non tech, are spending massively on capacity building and thus have increased their Capex to astronomically high levels.

   2. Technology due to a secular rise in spending on innovation and competitiveness and the continued digitalization of the economy.

8. The rising narrative for a move towards green energy might have some interesting implication on the US China Trade tussle. Minerals vital for the green energy production, such as Cobalt, Lithium, Graphite, are all primarily concentrated in countries that aren't part of any trade negotiations for this Green Energy move. Furthermore, China holds a commanding position in the production of both graphite and rare earth elements; the latter are critical components in a number of high-tech, strategic industries at the heart of the U.S.-China strategic rivalry.

9. There is a growing trend of custom investor made portfolios. Investors are demanding more than just the regular indexed products and ETFs. So now investors don’t own a piece of the mutual fund but in fact the whole portfolio is replicated and the investor owns every share of the index. I observe a lot of asset management companies rewriting their business playbooks. And now technology is at the front and center. This year has seen some of the landmark deals between banks/asset managers and fintech companies.

10. The Fed daily sells some securities to the MMFs and banks and then buys them back the next day at a higher price. And this is all done to offer banks an opportunity to earn some cents on the extra cash. This transaction volume has reached from some millions to 900 billions this pandemic. The reason is very obvious, the floodgates were opened to keep the economy up and running. The Fed then plays with these rates to achieve its objectives. These rates then have an effect on other market rates. The Catch- This time the interest rate transition is not working. In this pandemic the short term interest rates have fallen to near 0, meanwhile short term loan rates have diverged and now have been increasing for more than a decade. This means that the short term loans are getting cheaper for banks but expensive for people and the transmission mechanism isn’t working as expected.