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US Interest Rates, Evergrande, Time Crystals & SB Recommends!

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2022 US Rate Rise?

 

After months of speculation and the famous meetings to “talk about, talking about” QE tapering, we are now gaining increased clarity regarding the US Federal Reserve’s likely path forward.

The Fed on Wednesday kept its benchmark overnight lending rate in the current target range of 0% to 0.25%, where it has remained since March 2020 when the economy was shaken by the onset of the pandemic, but signalled that the tapering of their bond-buying program will begin “soon.”

What caught the attention of most observers was that half of U.S. Federal Reserve policymakers now expect to start raising interest rates next year and think borrowing costs should increase to at least 1% by the end of 2023, reflecting a growing agreement that gradually tighter policy will be required to keep inflation in check.

The sharper pace of interest rate increases, compared to the central bank’s last set of projections in June, comes as the economy continues its speedy recovery after a short-lived recession last year. This rapid recovery has led to a robust debate at the Fed about balancing its maximum employment and 2% inflation goals.

What it also demonstrates is that policymakers continue to see the Delta variant, which has dented economic activity, as having a short-lived effect on the recovery despite the current instability and insecurity it is causing.

By 2024, the Fed’s quarterly “dot plot” shows the median forecast for interest rates at 1.8%, still below the 2.5% level the Fed estimates neither stimulates nor restricts economic growth over the long run and therefore broadly accommodative of further job gains. That’s despite policymakers’ forecast for inflation to remain above the Fed’s 2% target through 2024.

At the press conference following the meeting, Fed Chair Jerome Powell said the latest set of forecasts showed an increasing convergence of views on the rate-setting committee that the economy will continue to strengthen from here.

 

SB Quick Take – Evergrande

 

Evergrande, which epitomises the borrow-to-build business model and was once China’s top-selling developer, has run into trouble over the past few months as Beijing tightened rules in the property sector to rein in debt levels and speculation.

Global investors have been on tenterhooks in recent weeks ahead of Evergrande’s payment obligations over fears its difficulties could pose systemic risks to China’s financial system, and possibly spill over to other markets.

This is a complex issue which has many interwoven elements with the broader developing situation in China as President Xi Jinping centralises his power and increases his control over the world’s most populous nation.

Given these complexities we felt this was the perfect topic to kick off a new feature, SB Quick Takes. These short videos are designed to offer a deep dive on a specific topic or theme, unpack the various elements at play, and to discuss our views on risks as well as portfolio implications.

 

September Market Wrap

 

Historically, September is a weak month for equity markets and so far, this September is no different. Equity markets in Australia and the US have been in the red for most of the month, the All Ords are down about 1% and the S&P 500 is down about 1.5%. There has been a host of reasons for this minor sell-off, including rising covid infections, market concerns regarding the potential effects of Evergrande’s debt crisis and the proposal by the Democrats to increase corporate taxes in the US.

In the past few days, markets have begun to climb back from the lows of the month thanks to the belief that the Evergrande crisis will be contained in China and not cause significant knock-on effects. Another piece of news that has contributed to the market recovery came out of the US Federal Reserve’s latest meeting, in which Jerome Powell comforted markets by dismissing lingering fears surrounding imminent rate increases.

 

Melbourne Shakes

It has been a challenging week for our clients, family, and friends in Melbourne as their lockdown continues, in fact they are set to overtake Buenos Aires to claim the unenviable title of the world’s most locked-down city on October 4. Possibly not entirely surprising that tensions are frayed with escalating hostilities and flashpoints on the city streets.

Against this regrettable backdrop, the city and surrounding region experienced a much less expected occurrence this week, a 5.8 magnitude earthquake, making it the largest onshore earthquake in Victoria’s recorded history.

Although Australia is located far from the major fault lines typically associated with earthquakes, the continental plate on which Australia sits is moving north at about 7cm a year, building up compressive stress within the plate. This stress is occasionally released, resulting in an earthquake, typically along pre-existing fault lines within a plate.

The epicentre for this earthquake was Mansfield, in the foothills of the Victorian Alps, but it was felt as far away as New South Wales and Tasmania. This article by 9News places this weeks earthquake into the context of Australia’s most destructive over time. This includes the 1989 5.4 magnitude quake that struck Newcastle killing 13 people and injuring more than 160. Ground movement was reported 800 kilometres away from the city as it caused an estimated $4 billion in damage. We can be very grateful this week that no souls were lost, and damage was minimal.

3 More IPO Billionaires

The continued strong appetite for investment in technology businesses has seen shares of Toast, a US restaurant point of sale platform, surge 56% on their opening day of trading on the New York Stock Exchange with market capitalisation topping US$30 billion.

The impact of this opening day rally saw the three co-founders of the business join the billionaire club, with each owning shares worth over US$1 billion.

Steve Fredette, Aman Narang and Jonathan Grimm started the company in 2012 after their prior employer, Endeca, was sold to Oracle for $1 billion. They stayed home in Cambridge, Massachusetts, and built their restaurant hardware and software system by testing products on local bars, restaurants, and cafes.

They are among a long and growing roster of tech founders who have joined the three-comma club in 2021. Some may argue this is an alarming sign of overexuberance and foolish speculation akin to the dot-com bubble which popped in early 2000. Others will counter that we are in an age of technology revolution. The original dot-com bubble was built almost entirely on speculation, where today’s leading technology behemoths have revenues and profits on a gargantuan scale.

The risk for investors is one of FOMO (Fear-Of-Missing-Out). While this revolution will crown many winners, it will also have more than its fair share of failures. More important than ever is the need for careful due-diligence and prudence to make sure you are backing the next Amazon, not the next pets.com.

 

Google Quantum Computing Breakthrough

Eager to impress your friends with geeky technology knowledge, then this story is right for you. Researchers working in partnership with Google may have just used the tech giant’s quantum computer to create a completely new phase of matter, a time crystal.

I appreciate time crystals may sound like majestic objects from science fiction movies that unlock passageways to parallel universes, but they are very real and have been seen as a pivotal development step in the quantum computing journey. In simple terms, time crystals are a new state of matter. It is a crystal with no entropy, meaning it can change its state without losing or using any energy. For eternity! The potential applications of this technology are enormous.

Scientists have successfully created micro-scale time crystals for years to provide energy to ultrapowerful computers. Quantum computing is weighed down by hard-to-control qubits, which are error-prone and often die. Time crystals might introduce a better method for sustaining this form of computing.

The scientists involved in Google’s research say they can’t discuss their findings as they undergo peer review. However, if the new study holds up under the scrutiny from the experts in the scientific community, and if anyone manages to use these time crystals in a practical manner, we may find ourselves in a world with incredibly powerful and practical quantum machines which offer almost limitless possibilities.

 

Light at the end of the tunnel

As lockdowns endure across Sydney and Melbourne, the countdown is now on to reaching those precious 70% to 80% fully vaccinated levels that will offer the return of greater freedoms we would usually take for granted. Not anymore.

At Stanford Brown, we continue to monitor the daily numbers and the evolving advice from NSW Health in determining the appropriate office reopening policy. Our team are actively booking in client meetings for the months of October and November. At this point we are arranging those as virtual meetings; however, we will start to offer in-person meetings as soon as the health settings allow. You can expect to hear more from us over the weeks ahead as the details on office rules are released by NSW Health. We have light at the end of the tunnel.

I share again the Guardian tracker on the rollout across the nation, including estimates as to when we may reach the 70% and 80% milestones. For those of you interested in keeping track of the global vaccine roll-out, we again share the Financial Times rolling tracker.

 

SB Recommends

Following on from the wonderful debut to this feature by SB Adviser Cris Abellar last month, today we introduce SB Adviser and Insurance Specialist Matthew Prain to share his favourite lockdown entertainment. Enjoy.

Take care and have a wonderful weekend.

Vincent O’Neill

CEO