Energy Weighting Jumps in 2022 but Still Historically Low
April 4, 2022
In the first months of 2022, the Energy sector weighting in the S&P500 jumped from <3% to 4%. In 1980, at the height of the Iranian crisis, after advancing 83% during the year, it was 28%.
Even relative to the modest levels of the 1990s, the current weight is low:
Negative real yields place banks in Argentina and Turkey in a very interesting position. For an Argentine bank, there is a negative real rate of return when buying a 10-year government bond: -1.90%. However, the depositor gets -12.44%. Since the bond is purchased with the funds of the depositor, the bank earns the difference between -1.90% and -12.44%. That is a substantial profit, and can be amplified as much as 10x due to the bank’s leverage.
The Turkish bank pays a depositor 12.50% and earns 24.19% on the Turkish government bond. This 11.69% spread is below the Turkish inflation rate of 61.1%, but the bank can be 10x leveraged – that enables it to earn 10x its spread, or 116.9%, well above the inflation rate.
In the case of Brazil, a bank earns a positive real rate of return on its government bond investments of 0.71%. The depositor earns a negative real rate of return of -3.10%. Therefore, a bank using the funds of the depositors to purchase 10-year government debt will earn a real return of 3.81%: the bank captures the negative real rate of return of the depositors as a positive real rate of return for itself.
This is a form of wealth transference. The purchasing power debasement endured by the depositor in Brazil is an augmentation of the bank’s purchasing power, which is then multiplied by the bank’s leverage.
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