Good morning.
Global markets are having a rough morning with investors taking cover in, gulp, bonds. Omicron jitters are sinking European equities while U.S. Futures are under pressure, all but erasing yesterday’s bounce-back.
The big culprit: the Moderna CEO warns that our current arsenal of vaccines may not be sufficient to fight the mutant variant. “All the scientists I’ve talked to... Are like ‘this is not going to be good,’” Moderna’s Chief Medical Officer Paul Burton tells The Financial Times. That pronouncement is sinking risk assets, from tech stocks to Bitcoin to crude.
For those of you who are wondering when the calm will return to the markets, I share in today’s essay an emerging view on risk-modeling that goes something like this: We live in an increasingly complex world, and markets by their nature reflect this. This comes from a camp of money managers and markets pros that go by the name of econophysicists. More on their story, and what it might mean for your portfolio, below.
Before we get into that, let’s see what else is moving markets.
Markets update
Asia
- The Asian markets were mostly lower. The Hang Seng fell nearly 1.6% as Omicron concerns take center stage.
- The World Health Organization is warning Omicron could pose “severe consequences” if member states fail to sufficiently test and trace suspicious cases.
- Mainland China stocks outperformed the bunch (though still down on the day) following some decent Chinese manufacturing data showing supply chain pressures easing.
Europe
- The European bourses were a blur of red out of the gates. The benchmark Stoxx Europe 600 was off roughly 1.4% two hours into the trading day with every single sector trading lower.
- A fresh batch of i nflation data has come in from around the euro zone, and it’s a doozy. Inflation-phobic Germany just saw prices rise in November by 5.2%, a 29-year record. It’s likely to put pressure on the ECB to reassess its rates policy. The euro is gaining on the news.
U.S.
- U.S. Futures are tumbling this morning following Monday’s broad-based pull-back. Yesterday, the three major averages closed higher with tech stocks leading the way.
- Fed Chair Jerome Powell will testify before the Senate Banking Committee later today that he sees the recent uptick in coronavirus cases, and the specter of Omicron, as a major headwind that could mess with growth, the labor market and with inflation.
- Shares in Twitter were down 0.5% in pre-market this morning following a topsy-turvy session on Monday. Before the bell yesterday co-founder Jack Dorsey announced he’s stepping down. That sent shares rallying before they bombed lower in afternoon trading.
Elsewhere
- After an up-and-down Monday, gold is bouncing back. It trades below $1,800/ounce.
- The dollar is off.
- Crude is turbulent again with Brent down near $71/barrel this morning. It’s down more than 10% in the past week.
- Crypto continues to slump. Bitcoin trades around $56,700, virtually flat over the past week. Ether is holding its own, trading around $4,400.
***
Embrace the crazy
Palazzo Massimo in downtown Rome holds some of the greatest antiquities in the world, including my personal favorite: the pre-Christian bronze statue of the defeated boxer. What happened on the roof of that building about 15 years ago, in a way, is just as wondrous.
On many a chilly night, a team of Italian researchers set up a field lab there to track the seemingly chaotic flight patterns of starlings, a pooping menace that descends upon the city this time of year. There’s a name for the birds’ whipsaw-like flight formations: murmurations. Figure out how the starlings do their nightly dance in the sky, the scientists figured, and it could unlock bigger mysteries about the uncertainty we find in an increasingly chaotic world.
There’s one more thing you should know about this research: it was headed by Giorgio Parisi, the Rome-born physicist who was awarded the Nobel Prize in Physics last month. In the time since the research was published, it’s become something of a North Star for those in the markets who study extreme volatility. Parisi and his team could have never known it then, but the murmurations study has proven to be a remarkably instructive blueprint. It’s helped some of the geekiest money mangers out there—so-called “econophysicists”—understand and model the many manias, rallies and crashes that have slammed investor portfolios since the start of the pandemic.
Yes, this group has turned to a branch of physics known as complexity science to understand things like crypto rallies and the meme-stock frenzy.
For Coins2Day‘s annual Investor Guide issue, I wrote about this Nobel laureate’s life work, and how it’s inspiring a new group of investment pros to spot unexpected markets trends—think meme-stonk rallies and NFT bubbles—before they wreck your portfolios. This group is somewhat unusual. For starters, I write, they “view the markets as a complex system in which the individual, or ‘agent,’ has the potential to influence the crowd. An agent could be any active market participant: a Pimco pension fund manager, a stock-pumping YouTube bull, or even you with your tech-heavy portfolio, your Twitter boasts, and your penchant for cornering people at dinner parties to defend Tesla’s P/E valuation.”
The econophysicists were in no way surprised that a day-trading YouTube influencer Roaring Kitty triggered the epic run in GameStop last January. And, they’re all but assured we’ll see more meme-stock moments in the future, particularly as individual investors become the new force in the markets—in essence, completely transforming the investing power structure.
In short, if you think the markets are crazy and illogical, econophysicists want you to consider a different way to look at all that craziness.
As one econophysicist and hedge fund chairman told me, extreme markets moves are no bug, but rather, they are “in the cards.”
I had a lot of fun writing this story. I love protagonists like Parisi, a consummate puzzle-solver who has set himself the goal of unraveling entropy and uncertainty in Rome—and beyond. When he won the Nobel Prize (along with two other physicists) this autumn, I knew we needed to get his big ideas into the pages of Coins2Day. A huge thanks to my editor Matt Heimer for supporting this somewhat unorthodox story idea, and helping me bring it to life.
For our subscribers, here’s the story in full. Not a subscriber? If you scroll down to “Today’s Reads,” there’s a link to a great discount.
And for those of you who prefer to read a long-read feature in print, the new issue comes out in a couple days.
***
Bernhard Warner
@BernhardWarner
[email protected]
As always, you can write to [email protected] or reply to this email with suggestions and feedback.
Today's reads
Twitter CEO Jack Dorsey stepping down—Coins2Day
Female founders are crashing the billionaire club—Coins2Day
The corporate world’s race to net-zero hinges on tiny villages in the DR Congo—Coins2Day
Millennials Confront High Inflation for the First Time—New York Times
Microsoft’s Satya Nadella Sells Half of His Shares in the Company—Wall Street Journal
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Market candy
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Of all the shortages afflicting the U.S. Economy, the housing shortage might last the longest.
That's the assessment of the 2022 U.S. Housing market outlook from Goldman Sachs. The investment bank sees a supply crunch messing with house prices in the year ahead too, pushing sales prices up a whopping 16%, which would be a record. My colleague Lance Lambert rolls out seven graphs that reveal just how whacky the U.S. Housing market has become.
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