Portfolio update – July 2022

The month of July came to an end, and once again I’m here updating my views on the economy and the market, and obviously on my positions and investment ideas. It’s the first time I do so writing an article on my website: usually I do as a post on LinkedIn, but I think this space is better suited for the job. You can check the portfolio’s open positions and performances here. Be sure to subscribe to my newsletter here to get notified when the next portfolio update is published!

Positions and trades

Starting with my portfolio, the performance for the month of July is +5.49%, lower than the benchmark indices mainly due to my overall risk-off positioning. Indeed, the only open position remains Blackstone, which accounts for a fourth of the AUM, and the rest is cash. The portfolio has a 100% exposure to the U.S. dollars, although both the NAV and the performance are computed in euros, since I’m a European citizen. As the euro continues to weaken, this positioning plays in my favor.

This month, my trades were:

  • Increased my position of Blackstone by 2%, buying more under the $100 level, and averaging down my cost even more;
  • A 5.42% AUM play on Visa’s earnings, which was closed the day after at loss. The loss was around 2% of the position, so the impact on the overall portfolio performance is negligible.

Views on the economy

On July, we had many important data being released, especially regarding the economic conditions in the United States.

Starting with the most significant one, we finally got the confirmation that the United States are in a recession, as the GDP shrank for the second consecutive quarter. Although the administration is trying its best to change the definition of both the term “recession” and the term “definition”, market participants are not so easily deceived. It seems like a big news, but actually most of us were saying this since months.

Then, we had the FOMC meeting, which resulted in another 75bps rate hike in order to fight inflation. Although the chairman Powell clearly said that the board thinks to have reached the neutral rate and the market rallied on the news, I don’t believe that is some kind of bullish news, for two main reasons:

  1. The neutral rate is a theoretical rate, which is extremely difficult to estimate ex-ante and can only be observed by its consequences on the overall economy. Even if we actually got to neutral right now, the amount of noise coming from the influence of external factors would be so high, that we wouldn’t know anyway. I think the Fed won’t be able to see if we reached neutral with this rate before two months at least, and at that point it will be useless information.
  2. Even assuming that the Fed was actually able to estimate the neutral rate, and we saw this is a big assumption already, it wouldn’t be bullish. Indeed, the fact we reached neutral merely says that the Fed is not fueling anymore the heat of the economy. Already, for it to be effective at fighting inflation, the stance should be more restrictive, cooling off the economy and, therefore, getting above the neutral rate.

The market interpreted the news as a sort of pivot, thinking there will be hikes no more and the QE-fest will restart soon. However, if anything, the Fed confirmed they’ll continue to hike according to what happens in the economy. The remarks they had on the labor market only reinforced this stance, as inflation can’t come down until the unemployment is kept this low. The only way to slow down inflation without destroying the economy is to act on the supply side. However, it can’t be done rapidly enough not to make everyone poorer with a never-ending upwards spiraling inflation anyway, especially as China continues with its prolonged lockdowns.

Speaking of inflation, the U.S. CPI for the month of June was 9.1%, higher than expected. I strongly believe the rate of acceleration for the CPI, meaning its MoM measure, will slow down a little during the summer months. However, I don’t think inflation has peaked already: indeed, it takes time for the labor market to inflation-adjust wages, and once it happens, the prices will adapt to the higher costs too. Also, as the PCE printed higher than expected, we can see part of that is already happening.

Finally, moving to Europe, what a mess is that continent. Not only the EU is experiencing high inflation, recession, layoffs, political instability and social unrest, but there is also the ECB which prefers to wonder how green is the financial system rather than act on its mandate. However, it’s easily understandable why: the entire economy of the EU countries is financed on low rates, and if these were raised, we could probably see a sovereign debt crisis in the southern countries similar to what happened in 2011 already. To solve this problem, the ECB created a new bond-buying program, basically a rebranded QE, which aims to fight fragmentation issues while raising rates at the same time. We don’t know the details of the program, nor we know how will it be applied and its restrictions: until then, I won’t make judgements on it.

One thing’s for sure, though: EU made a terrible move enacting sanctions on Russia, whose energy is dependent on, and should rapidly cancel them if it doesn’t want to experience extreme social unrest when winter will arrive. Since day one, I strongly suggested that the best strategy for the EU regarding Ukraine was to stay absolutely neutral: you can’t spit on the one who feeds you. However, political correctness and virtue signaling prevailed over rationality and foresight.

As the continent’s economic conditions further deteriorate, I expect European leaders to either step down or force some kind of peace treaty between Ukraine and Russia, possibly conceding the latter the territories it conquered. Otherwise, it will be a cold winter for Europeans, and I wouldn’t bet on political stability. Therefore, I keep being short the euro. Furthermore, as I’ve announced already, if neither the ECB nor the EU will start acting rationally, I’ll probably initiate a short position against southern countries’ sovereign bonds.