(ZH) Michael Burry: "US Is In Recession, Fed Will Cut And Will Cause Another Inf

Michael Burry: "US Is In Recession, Fed Will Cut And Will Cause Another Inflation Spike"

In the waning days of 2022, one of the most bearish (and accurate, at least as far as last year was concerned) strategists, SocGen's resident permabear Albert Edwards, laid out what he thinks will be the big surprise of 2023, which will be "a return to deflation fears as headline CPI inflation drops close to, or likely below zero. Investors are already anticipating recession and have an unusually strong preference for bonds."
Edwards' also expects that while the current recession and collapse in commodity prices will also cause headline inflation to collapse, core inflation will abate too but remain sticky around 3% due to residual wage-price inflation (justifying the inevitable change in the Fed's target).
Which, to Edwards, sets us up for the worst possible scenario: a second wave of inflation, just like we saw in the 1970s under the Burns Fed, to wit: "any decline will be purely a cyclical phenomenon rather than a full-blown return to the Ice Age theme" and as a result, "investors have not yet discounted a second secular wave of inflation as we eventually exit this unfolding recession – ie the Great Melt."
While Edwards is hardly alone in calling for a recession and a deflationary reversal of current soaring prices, following by an even more brutal inflationary wave as Powell reveals he was not Volcker by Burns all along, overnight another bearish icon repeated the exact same sequence of events.
Tweeting late on Monday, Scion Capital's Michael Burry, aka "the Big Short" said that while inflation has peaked, it is likely to pick up again in response to the coming stimulus which will be unleashed to offset the painful 2023 recession.
“The US in recession by any definition,” Burry tweeted on Sunday, echoing Albert Edwards verbatim, adding that "Fed will cut and government will stimulate. And we will have another inflation spike.”
Burry is certainly right about the US being in a recession, especially now that more than half of US states have negative growth, a threshold that has always led to recessions in the past...
... the last, missing piece is the BLS admitting the US labor market is in freefall and now that even the Philadelphia Fed has opened up the pandora's box over rigged jobs data, it is only a matter of weeks if not days before the Dept of Labor admits it made a "mistake."
Where Burry is wrong is in expecting a government, or fiscal, stimmy. With Congress now divided at least until 2024, one can kiss any major, multi-trillion injection goodbye until after the next presidential election (absent a war with China of course). Which means the only stimulus for the next 24 months will have to come from the Fed, i.e., monetary, and thus will stimulate risk assets far more than the economy.
This was Burry's latest warning since September, when the S&P tumbled to its 52-week lows, and when the Big Short predicted more pain for the stock market, saying “we have not hit bottom yet.” However, the weeks following the September dump saw stocks briefly soar into a bull market amid a powerful short squeeze expect a Fed pivot; it remains to be seen if stocks will take out
In the second quarter, Burry put his money where his mouth is, as his firm dumped all of its equity exposure besides one company. One quarter later, Burry was back in the market, adding to his GEO Group stake and opening new positions in 5 companies as we discussed at the time.

FT : Chip designer Arm targets car market for growth

Chip designer Arm targets car market for growth
SoftBank-owned company battles Intel and MIPS in auto sector as it prepares for blockbuster listing

Chip designer Arm has more than doubled revenue at its automotive business since 2020 as the UK-headquartered company seeks new avenues for growth ahead of a hotly anticipated public listing this year.

Dennis Laudick, vice-president of automotive go-to-market at Arm, said the pace of the segment’s growth — to power everything from electrification to advanced driver assistance systems (ADAS) and in-vehicle “infotainment” — had been faster than its other divisions such as smartphones and data centres.

That is because modern cars require a greater amount of chips, which are also more expensive than ever before. It is one of the few parts of the chip sector that is expected to suffer from severe shortages throughout this year because of strong demand.

“A high-end car is approaching one of the most complex pieces of software you can have in the world at the moment,” Laudick told the Financial Times. “It’s basically a data centre on wheels.”

Arm’s total revenues grew 35 per cent in 2022 to £2.7bn. The SoftBank-owned company does not disclose specific figures, but said revenue from its automotive business increased fivefold over the past four years.

Its concerted push into supplying an industry rapidly turning to electric vehicles and driverless capabilities will be crucial to the plans drawn up by SoftBank’s billionaire chief Masayoshi Son for Arm’s return to the public markets this year through a blockbuster New York listing.

Investors will be sizing up whether Arm, which has profited hugely from providing the chip designs found in most of the world’s smartphones, can continue to achieve growth.

It faces stiff competition from rivals like Intel, MIPS and Synopsys, which are also battling to build the most efficient and powerful intellectual property for chipmakers in an industry that is evolving quickly.


“The semi industry has been doing well in giant spurts of growth and now all of the chip companies are chasing the next high,” said Jay Goldberg, an analyst at D2D Advisory. “The automotive market is crucially important, and no one has won that yet.”

SoftBank’s Son announced in November that his exclusive focus from now on would be the chip designer. “I’ll be thinking about the business opportunity for Arm — the source of my energy, the source of my happiness, the source of my excitement,” he said.

SoftBank, which has owned Arm since 2016, has retrenched to a more defensive strategy after recording $10bn of losses in the past quarter.

Arm had now captured around 85 per cent of the global market for in-vehicle “infotainment”, and 55 per cent in ADAS, Laudick said. All of the top 15 automotive chipmakers, including Nvidia, STMicroelectronics and Renesas, use designs licensed by Arm.

However, the company faces much stiffer competition on chips for functions like sensors and body control.

While Arm has made significant inroads developing IP for chips used in data centres in recent years, it is the automotive market — which already contain dozens of concealed computers that have an insatiable appetite for increasingly advanced chips — that Arm is focusing its attention on most acutely.

Some high-end vehicles contain more than 100mn lines of code, with fully autonomous vehicles expected to reach half a billion by the end of the decade — compared with a Boeing 747 aircraft that contains about 14mn.

The average value of semiconductors per car is forecast to rise from $700 in 2020 to $1,138 by 2028, according to S&P Global Mobility.

“Even traditional automotive applications need a quantity of silicon much higher than in the past,” said Marco Monti, president of automotive at European chipmaker STMicroelectronics, speaking at the company’s capital markets day last year.

Monti said that automotive chip demand was accelerating rapidly, even as demand for cars themselves remained flat, adding that full electrification would add around $1,000 in the value of semiconductors to each vehicle and could require up to five times more chips.


As cars have progressed from being predominantly large boxes of hardware to complex agglomerations of software, powering everything from steering to entertainment, Arm has rapidly increased its investment in software engineering.

In 2016, the company invested around 75 per cent of its engineering resources in hardware, with 25 per cent on software. Today, it says the split is 50:50.

Arm is increasingly giving automotive chipmakers such as STMicroelectronics and Nvidia the ability to play around with different types of designs before they buy a licence, as a way to familiarise them with its products and capture customers in a competitive market.

This strategic manoeuvring is central to the company’s ability to attract and retain customers across its business, given that some of its most nimble competitors — including companies offering a rival open source alternative to Arm called Risc-V — allow engineers to tinker with their IP.

Not all chipmakers have been won over. Mobileye, an autonomous driving company that was spun out of Intel in October and has 70 per cent of the market for cameras used in driver-assist technology, uses IP developed by MIPS, based on Risc-V, for some of its most advanced chips.

“We like to buy a [computer processing unit] that has multiple vendors,” said Amnon Shashua, Mobileye’s founder, referring to the attraction of the open source architecture underpinning MIPS’s designs. Mobileye builds the rest of its chips — for things like infotainment and displays — in-house.

Shashua added that if Mobileye had been entirely reliant on Arm, and the chip designer had been successfully sold to rival chipmaker Nvidia for $66bn last year, it “would have been a disaster”.

The most advanced autonomous cars are only expected to come to market at the end of the decade. In the intervening years, chip designers including Arm, Intel and MIPS will be busily crafting designs for the next fleet of vehicles that will transform how millions travel.

“They’re fighting the fight now,” says Goldberg, but “no one is going to win for a few years.”

>>> US After Hours Summary: SGH +7% higher on earnings; VERA -60.7% falls on tri

After Hours Summary: SGH +7% higher on earnings; VERA -60.7% falls on trial data

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: NGL +9.6% (increases its FY23 adjusted EBITDA guidance; also names new CFO), SGH +7%

Companies trading higher in after hours in reaction to news: QIPT +8.1% (acquires Great Elm Healthcare), VIR +3.6% (Critical Phase 2 readouts anticipated in 2023), GERN +3.3% (to discuss top-line results from the IMerge Phase 3 clinical trial of imetelstat), GBX +1.7% (acquires GBX Leasing, its railcar leasing JV), CSWC +1.5% (releases overview of its capital markets activity for DecQ), TERN +1.4% (Suvretta Capital discloses 7.0% stake), ALG +1% (increases dividend), SWBI +0.9% (gun stocks on radar as criminal background checks rise to highest level in nine months), RGR +0.6% (gun stocks on radar as criminal background checks rise to highest level in nine months), PPL +0.3% (to provide update on progress being made as the new PPL), BHIL +0.2% (to sell the assets and equity related to its Fresh business), NEXA +0.2% (production at Atacocha mine temporarily suspended), TALO +0.1% (successfully discovers commercial quantities of oil & gas)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: None

Companies trading lower in after hours in reaction to news: VERA -60.7% (topline results of Phase 2b ORIGIN trial of Atacicept), PHAT -25.8% (FDA notifies co no action will be taken on its NDA for vonoprazan; co no longer expects product launches for H. pylori or erosive esophagitis in 1Q23), ADCT -10.6% (names new CMO), AXL -2.2% (names new CFO), KIM -0.9% (files mixed securities shelf offering), WTRG -0.8% (to sell its West Virginia natural gas utility assets), OZK -0.5% (increases dividend), RIVN -0.1% (reports Q4 production and deliveries)

>>> US Close Dow -0,03% S&P -0,40% Nasdaq -0,76% Russell -0,60%

Closing Stock Market Summary

It's a new year, but the stock market is dealing with the same issues that plagued investors in 2022. The day started on an upbeat note with the main indices logging decent gains thanks to some bargain hunting activity before those gains quickly evaporated on renewed selling interest. The S&P 500 touched 3,878 at this morning's high before briefly dipping below 3,800 around midday. 

Market participants digested a slew of sub-50.0 (the dividing line between expansion and contraction) manufacturing PMI readings for December out of Asia and Europe over the weekend. These reports added fuel to existing concerns about the Fed and other central banks risking a major policy mistake by continuing to raise rates without a full appreciation for the lag effect of prior rate hikes.

The key recognition for stock market participants is that a weaker economic backdrop might cause further downward revisions to earnings estimates, equating to valuation concerns.

Strikingly, the advance-decline line still skewed more positive. Advancers led decliners by a 3-to-2 margin at the NYSE and an 11-to-10 margin at the Nasdaq. Buyers were a reluctant bunch nonetheless, unnerved perhaps by how quickly today's early gains evaporated and the poor showing from some mega-cap issues following a dismal 2022 performance.

Sizable losses in a handful of widely-held and heavily-weighted stocks kept the indices under pressure. Tesla (TSLA 108.10, -15.08, -12.2%), which disappointed with Q4 deliveries, Microsoft (MSFT 239.58, -0.24, -0.1%), NVIDIA (NVDA 143.15, -2.99, -2.1%), and Apple (AAPL 125.07, -4.86, -3.7%), which reportedly told suppliers to build fewer components for several devices in Q1 due to weakening demand, were among the more notable standouts in that respect. 

Not all the mega-cap stocks sold off today. Gains in Meta Platforms (META 124.75, +4.40, +3.7%) and Alphabet (GOOG 89.70, +0.97, +1.1%) helped propel the S&P 500 communication services sector (+1.4%) to first place on the leaderboard. Also, Amazon.com (AMZN 85.82, +1.82, +2.2%) helped temper the losses in the consumer discretionary sector (-0.6%) that were driven by Tesla.

Meanwhile, the energy sector (-3.6%) was the worst performer by a wide margin as energy complex futures continued to lose ground. WTI crude oil futures fell 3.9% to $76.97/bbl and natural gas futures fell 10.4% to $3.68/mmbtu.

Treasury yields moved lower today, but that didn't help fuel any buying interest in the equity market. Investors were cognizant that falling Treasury yields are an offshoot of concerns about weakening growth that raises the specter of downward revisions to earnings estimates. The 2-yr note yield fell five basis points today to 4.37% and the 10-yr note yield fell ten basis points to 3.78%.

  • Dow Jones Industrial Average: flat YTD
  • S&P Midcap 400: -0.5% YTD
  • S&P 500: -0.4% YTD
  • Russell 2000: -0.6% YTD
  • Nasdaq Composite: -0.8% YTD

Reviewing today's economic data:

  • Total construction spending increased 0.2% month-over-month in November (consensus -0.4%) following an upwardly revised 0.2% decline (from -0.3%) in October. Total private construction increased 0.3% month-over-month while total public construction spending decreased 0.1%. On a year-over-year basis, total construction spending was up 8.5%.
    • The key takeaway from the report is that new single family construction continued to decline, clipped by higher interest rates that are making construction projects more expensive to finance at a time when broader economic activity is slowing due in part to the higher interest rates.
  • The final IHS Markit Manufacturing PMI reading for December was unchanged from the prior reading of 46.2.

Looking ahead to Wednesday, market participants will receive the following economic data:

  • 7:00 a.m. ET: MBA Mortgage Applications Index for the week ending 12/31
  • 10:00 a.m. ET: December ISM Manufacturing Index (consensus 48.5%; prior 49.0%) 
  • 10:00 a.m. ET: November JOLTS Job Openings (prior 10.334 million)
  • 2:00 p.m. ET: FOMC Minutes for the December 13-14 

FT : Airbus: aerospace giant should beware geeks bearing gifts

FT : Airbus: aerospace giant should beware geeks bearing gifts
Diversifications into cyber security are tricky for defence investors to assess

The Ukraine war has revived the threat of conventional conflicts for developed nations. That has boosted the defence sector, in which Airbus participates. But the interest the Toulouse-based group is reportedly taking in the cyber security and big data arm of Atos is incongruous. Cyber warfare is a different activity to the physical sort.

The French software group is the kind of vendor that acquirers like: distressed. But there is a further incongruity in talk of Airbus buying a minority stake in the Evidian division of Atos. It would hardly be material to the aerospace group.

Defence and space activity makes up just over a quarter of Airbus’s top line, though its separate helicopters unit has defence exposure, too. Within defence and space, the software businesses — within connected intelligence — make up an even smaller part.

Diversifications into cyber security are tricky for defence investors to value, as BAE’s purchase of Detica illustrated. Competence and cash flows are harder to assess than in military hardware.

Building jets is Airbus’s main activity. In the nine months to September 2022, this accounted for more than 90 per cent of group operating profits. Airbus has dabbled in software previously via its Skywise project, with US partner Palantir. Not much has come of this so far, says Jefferies.

Perhaps Airbus boss Guillaume Faury believes stake building could pave the way to a purchase of Evidian. Atos chief executive Rodolphe Belmer may have resigned last year because the board resisted a trade sale and favoured a demerger.

Atos has already entertained at least one offer for Evidian. A bid led by consultants Onepoint valued Evidian at €4.2bn, which Atos rejected. That looks low compared with an estimate from Citi of €4.6bn including net debt and pension liabilities.

In its current form, the software group is burning cash flow at an average of €385mn annually through 2025, according to S&P Global estimates. There is a danger Airbus would help fund a rescue if it becomes embroiled with Atos. That would please the French government but harm shareholders.

FT : University of California invests $4bn in Blackstone’s real estate fund

University of California invests $4bn in Blackstone’s real estate fund
Private equity group offers minimum annual return of 11.25% with $1bn backstop to entice endowment

One of the largest endowments in the US is making a $4bn investment into Blackstone’s flagship private real estate investment trust, in a move intended to shore up confidence in a $69bn fund that put limits on investor withdrawals last year after suffering heavy redemptions.

The University of California’s endowment, which manages more than $150bn of assets, said on Tuesday that it would make the investment in the Blackstone Real Estate Income Trust, or Breit, at its current net asset value. That means it is taking a large position at the same valuation as the fund’s more than 200,000 existing investors.

However, Blackstone has promised a minimum annual return of 11.25 per cent for six years and is providing a $1bn backstop if the fund does not achieve that target. In exchange, the endowment has agreed to lock up its capital in the fund until 2028, while paying higher overall fees if the vehicle performs well. Other investors do not benefit from the same arrangement.

The investment was a “validation” of Breit’s investment portfolio and performance, said Blackstone chief executive Stephen Schwarzman.

In November, Blackstone limited investor withdrawals from Breit after breaching monthly and quarterly limits on redemptions, an announcement that cast doubt on the future expansion of the fund and prompted a sharp slide in the New York-based private equity group’s shares. Breit has grown quickly in recent years and accounts for a fifth of the group’s fee-based earnings, according to analysts.

Blackstone shares were up nearly 2 per cent at midday in New York following the announcement. The company’s stock price has plunged more than 40 per cent over the past 12 months.

After the restriction was put in place last year, Jagdeep Singh Baccher, chief investment officer at the University of California, reached out to Blackstone to propose making a large direct investment in the fund. On December 8, Singh spoke to Blackstone president Jonathan Gray to propose the investment.

“We consider Breit to be one of the best positioned, large-scale real estate portfolios in the US, managed by one of the world’s top real estate investors,” said Singh. “This is an opportunity that comes only through strong, trusted partnership.”

While the university will be buying common shares in Breit, it will then move the investment into a strategic venture it has created alongside Blackstone.

Its $4bn investment will be combined with $1bn in shares Blackstone already owns in Breit and moved into a separate fund that carries a performance fee above an 11.25 per cent hurdle rate.

Blackstone would receive a 5 per cent cash performance payment on any returns in excess of that hurdle rate, the group said in a statement.

Those fees would be on top of Breit’s costs for all investors, including the University of California. Investors pay a 12.5 per cent performance fee to Blackstone above a 5 per cent annual hurdle.

If the fund performs poorly and does not achieve an 11.25 per cent annual return, Blackstone will return fees to the university until it receives its guaranteed return. If the fund were to fall in value, or earn minimal returns, Blackstone risks forfeiting the $1bn of shares, according to two people briefed on the agreement.

Blackstone said the investment was advantageous to the firm and its shareholders. It said it would make money on the investment if Breit returned an annualised return of at least 8.7 per cent over the next six years.

The university has agreed to hold its investment in Breit for a minimum of six years and then will have the ability to redeem its interests over a two-year period beginning in 2028. This contrasts with the monthly liquidity Blackstone offers the fund’s other investors, who can redeem up to 2 per cent of the fund’s overall assets a month, or 5 per cent per quarter.

The university’s investment comes as other investors continue to redeem from the fund.

In December, US investors sought to redeem 3 per cent of their overall assets in the fund and 5 per cent of all investors sought redemptions, according to sources familiar with the matter.

However, because of Blackstone’s restriction of withdrawals, just 0.43 per cent of Breit’s net assets were redeemed in December.

In a communication sent to Breit investors, Blackstone called the new investment a “win” for existing shareholders because it would increase the “balance sheet flexibility” of the fund and add capital during what “we believe is an opportune deployment period”.

The company also said the investment should bolster fees paid to the firm and its common shareholders.