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Let The Music Out Of The Box

The earnings season has just started and is expected to be constructive, with consensus beats on revenue. To use a great Irish expression before its shelf life expires, ‘the world is sucking diesel.’ The positive results may temporarily quell concerns about elevated valuation levels. Beyond the pricing vs. cost inflation equation, it will be interesting to monitor the evolution of capex intentions (beyond IT), with clear implications for long cycle end-markets, including many process industries.

Investors’ blinding obsession with the interplay between the Fed, fiscal policies, employment data, and inflation in the United States pushed the 10-year Treasury yield into a world of its own earlier this month (currently 1.30%). Hopefully, the summer will bring some fresh perspective and, with it, an orderly return to a healthier 1.5%-2.0% yield, noting that the currently assumed neutral nominal 10-year interest rate is c.2.5% (based on a neutral real interest rate or ‘r-star’ of 0.5% and an expected inflation rate of 2%.).

Meanwhile, it is raining sell-sides, to the point when selling a business has become dicier than anticipated at the beginning of the year. As mentioned in Pre-Emptive M&A Strikes,’ there are not enough human resources on the buy-side to handle all the auction processes, notwithstanding an abundance of capital. The current conditions have created a buyer’s market for many asset categories.

On the COVID front, all eyes are on the United Kingdom and the attempted return to normalcy next week. Three delicate questions of high relevance to many developed nations will be answered over the summer: how loose is the relationship between new cases and hospitalization in countries with advanced vaccination rates? Can a politically acceptable level of casualties emerge as the pandemic disease takes an endemic form? And is it possible to achieve herd immunity through vaccination?

The stakes are high. The answers will hopefully support an acceleration of vaccination rollouts across the world and an economic, financial, and mental recovery.

Over a countryside lunch in the Jura last weekend, I had the unexpected chance to discuss the world with Elizabeth Sombart, a renowned pianist. Prevented from performing live in front of an audience due to the health crisis, she lamented the alternative of streaming concerts in a letter to friends and fans. Her woes may resonate with many professionals: ‘Today, I sincerely feel that accepting to do streaming concerts [may lead to a] definitive substitution of ‘live’ by ‘streaming,’ falsely presented as provisional. I fear that a virtual performance will soon be imposed on us as the new norm. […] This system does not only put the music in a box but also us, as individuals.’

I wish you a great summer, including the opportunity to put world trends in perspective and to let the music out of the box.

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