Hello there,

A magnificent Monday to you as investors fret about risk of a more prolonged inflation fight on the back of a robust U.S. jobs data even as price pressures appear to be receding.

In brief (TL:DR)

• U.S. stocks were mixed on Friday with the Dow Jones Industrial Average (+0.23%) up, while the more rate-sensitive stocks of the S&P 500 (-0.16%) and the Nasdaq Composite (-0.50%) led those indices lower.

• Asian stocks slipped on Monday, hampered by expectations of further aggressive U.S. Federal Reserve interest-rate hikes to tackle the highest inflation in a generation.

• Benchmark U.S. 10-year Treasury yields were steady at 2.83% (yields fall when bond prices rise).

• The dollar edged higher.

• Oil remained below US$90 a barrel with September 2022 contracts for WTI Crude Oil (Nymex) (-0.17%) at US$88.86, with growing concerns over the demand outlook.

• Gold fell with December 2022 contracts for Gold (Comex) (-0.03%) at US$1,790.60.

• Bitcoin (+1.21%) rose to US$23,201 moving opposite to equities as optimism of the impending Ethereum merge helped to buoy sentiment.

In today's issue...

1. Buffett is Buying the Dip, Should You?

2. Don’t Bet on the Japanese Yen Rebound Just Yet

3. Wondering where Bitcoin is headed next?

Market Overview

Traders now see greater odds of another 75 basis-point Fed hike in September, part of a global wave of rate increases.

U.S. inflation data this week could shape views on that policy path and inject more market swings, but early signs point to more ebbing rather than rising prices.

Oil is trading at below US$90 a barrel and pump prices in the U.S. are well below US$5 a gallon. Wheat futures have also come off recent highs and there are signs that demand for durable goods is slipping.

While price pressures may be topping out, it’s unclear if they will persist a stubbornly high levels.

Asian markets were lower on Monday with Sydney’s ASX 200 (-0.06%), Seoul's Kospi Index (-0.22%) and Hong Kong's Hang Seng Index (-0.90%) down, while Tokyo's Nikkei 225 (+0.12%) was up slightly in the morning trading session.

1. Buffett is Buying the Dip, Should You?

• With the S&P 500 shedding 16% in the last quarter, Berkshire Hathaway came in to buy the dip, mainly in sectors that the investment holding company already is invested in and doubling down on fossil fuels.

• Buffett appears to continue to be bullish on sectors that he’s most familiar with, including logistics, insurance (which provides strong free cashflows) and energy, especially fossil fuels – sectors which are least sensitive to rate movements.

“Be greedy when others are fearful,” is one of the most well known adages attributable to Warren Buffett and in the last quarter, the legendary investor’s Berkshire Hathaway (-0.59%) has been very greedy indeed.

While the likes of Cathie Wood’s Ark Investment Management have been dumping shares of cryptocurrency exchange Coinbase Global (+4.67%), Berkshire Hathaway has been snapping up other stocks instead, determined to buy the bottom.

Berkshire Hathaway was a net buyer of US$3.8 billion in stocks over the second quarter of 2022, compared to being a US$16 billion net seller during the same period last year.

With the S&P 500 shedding 16% in the last quarter, Berkshire Hathaway came in to buy the dip, mainly in sectors that the investment holding company already is invested in and doubling down on fossil fuels, with an aggressive purchase of shares of Occidental Petroleum (+2.61%), raising questions as to whether an acquisition of the energy giant is on the cards.

But some analysts are warning that the bottom may not have been reached and although Buffett is a patient, measured and savvy value investor, many investors remain concerned about robust jobs data in the U.S. that could embolden even more aggressive U.S. Federal Reserve monetary policy tightening.

Fed officials have been far more hawkish in their rhetoric of late, with even the dovish Mary Daly of the San Francisco Fed articulating last month that the central bank was “nowhere near” being almost done cracking down on inflation.

Central bank watchers will know from experience that the Fed tends to act with a lag, being only able to justify policy moves on the basis of past data as opposed to future projections and in the case of inflation, only intervening well past necessary – the same could apply in the reverse.

With 528,000 jobs created last month instead of the 258,000 economists had forecast, and few (if any) signs that the worst of inflation is over, policymakers may be forced to double-up on rate hikes when they return from their summer recess in September.

More sanguine forecasts for rate hikes in September have policymakers raising borrowing costs by just 0.50%, although the strong labor markets in the U.S. are seeing revisions upwards to 0.75% and the most pessimistic at 1.00%.

Berkshire Hathaway’s insurance arm Geico saw setbacks due to higher auto insurance claims from an increase in the purchase of used vehicles while its railroad business posted significant gains as supply chain snarls continue to be unraveled.

Buffett appears to continue to be bullish on sectors that he’s most familiar with, including logistics, insurance (which provides strong free cashflows) and energy, especially fossil fuels – sectors which are least sensitive to rate movements.

2. Don't Bet on the Japanese Yen Rebound Just Yet

• While the yen has rebounded somewhat in recent weeks, helped in no small measure by the Bank of Japan pledging to pick up the slack, the slide may be far from over.

• Pressure has eased on the yen, with growing concerns over a recession in the U.S. but it’s less clear how long this will last.

Japan’s “lost decades” were marred by low productivity, growth and inflation, a period of economic stagnation and politicians are eager to avoid a repeat of those painful years.

With the Japanese yen having been hammered of late because of the U.S. Federal Reserve tightening policy, a move increasingly divergent from the Bank of Japan which has doubled down on keeping conditions, loose, the yen went into virtual freefall against the dollar.

And while the yen has rebounded somewhat in recent weeks, helped in no small measure by the Bank of Japan pledging to pick up the slack, the slide may be far from over.

After Japan’s economic bubble burst in 1990, the country became locked into a vicious cycle of stagnation – slow growth and slow or falling prices, leading to a persistent lack of demand.

Put simply, if consumers expect prices will continue to fall, there is no urgency to consume today.

And while a falling yen and soaring oil prices have pushed headline Japanese inflation to 2.5%, Tokyo appears to have plenty of appetite for more, because underlying inflation, excluding volatile food and fuel prices, is still weak.

Significantly, there has been no translation of higher prices to higher wages.

The Bank of Japan has also been so far successful in its yield curve control, significantly increasing bond purchases to enforce a cap on benchmark 10-year yields at close to zero, when hedge funds piled up short positions.

Pressure has eased on the yen, with growing concerns over a recession in the U.S. but it’s less clear how long this will last.

The Bank of Japan is undergoing regime change at the moment, with board member Guoshi Kataoka, a outspoken dove who believes in reflating Japan’s economy, replaced by the far more hawkish Hajime Takata who has long expressed skepticism about the feasibility of the central bank’s 2% inflation target and has been vocal about the negative side effects of easing.

Takata’s term expires next April and what matters is Japanese Prime Minister Fumio Kishida’s selection for a successor, which will shape a more long-term path for not just the Japanese economy, but the yen as well.

U.S. labor markets appear resilient and the Fed remains in denial about recession, meaning that the yen is likely to remain volatile for now, but has somehow survived the first round.

It’s less clear if the Bank of Japan can continue to weather the onslaught of multiple attacks on its attempts at yield curve control from well-oiled hedge funds which are lurking to bet that the yen can’t hold.

3. Wondering where Bitcoin is headed next?

• U.S. stocks and Bitcoin are up over the last few weeks and the 90-day correlation between Bitcoin and benchmark S&P 500 has restrengthened to 0.65, its highest level since 2010.

• Blockchain analysis of data from Glassnode, an analytics firm, suggests that Bitcoin active addresses remain within a downtrend channel, while transactions remain flat, meaning that a stable base of high conviction traders and investors remain engaged.

With the era of easy money and airdropped stimulus checks well behind us, cryptocurrency watchers are looking to stocks to see where cryptocurrencies could be headed next.

Even though the correlation between the Nasdaq 100 and Bitcoin has dropped to its lowest level in months, hitting a rolling 60-day correlation as low as 0.50 last month (a correlation of 1 means that two assets move in perfect lockstep), traders are still looking to equities to chart the outlook for crypto.

U.S. stocks and Bitcoin are up over the last few weeks and the 90-day correlation between Bitcoin and benchmark S&P 500 has restrengthened to 0.65, its highest level since 2010 and there is a growing view that crypto may be due for a bout of outperformance if equities have bottomed.

A robust U.S. jobs report last Friday however reignited fears that policymakers at the U.S. Federal Reserve may be emboldened to ratchet up rate hikes to focus solely on tackling inflation, especially since unemployment is not a major concern anymore.

Unfortunately, whether crypto or stocks have bottomed can only be known with the benefit of hindsight and it’s entirely possible that risk assets are stabilizing only to revisit fresh lows, whether this year or next.

Nonetheless, traders looking for some prospect of a more sanguine Fed at its next meeting in September could take some comfort from the fact that inflation appears to be slowing.

Front month WTI Crude Oil (Nymex) futures are trading well below US$100, ticking at US$88.84 at the time of writing and a gallon of gas at the pumps hasn’t been US$5 for some time in America.

Wheat futures are also well down from their recent all-time-highs and grain is slowly but surely making its way out of embattled Ukrainian ports.

Blockchain analysis of data from Glassnode, an analytics firm, suggests that Bitcoin active addresses remain within a downtrend channel, while transactions remain flat, meaning that a stable base of high conviction traders and investors remain engaged.

To that end, Bitcoin’s bottom may be (somewhat) more predictable than for stocks – because those who wanted to sell have already sold and those who remain are likely those who had bought when the cryptocurrency was a lot cheaper and are holding at all costs.

Bitcoin continues to hover around US$23,000 and has been unable to break a key resistance at US$24,000, especially in the absence of bullish macro factors, such as a Fed pivot to lower rate hikes (at the very minimum) which is unlikely in the coming months.

Even Coinbase Global’s partnership with the world’s largest asset manager BlackRock wasn’t enough to push Bitcoin higher, when in previous years, news of such a collaboration would have sent the cryptocurrency through the roof.