Geopolitics doesn't matter.........until it matters

What’s wrong with Germany?

Germany is heading into its first two-year recession in over 20 years after it was the worst performing major economy in 2023. Can we diagnose the problem? Political stability is central to business confidence. The current multi-party coalition government (incl. Far Right & Left elements) is causing some unease amongst investors. We cannot talk about German economic performance without mentioning China. German industry is feeling the effects of heavily subsidized Chinese goods competition and is losing market share in both mainland China and globally as competition increases. Clearly Germany relied too heavily on Chinese import demand and cheap energy supply from Russia. There exist structural problems also and most notably the ageing population. Germany’s industrial weakness will have ramifications for the rest of Europe. It is worth noting however that German weakness should be considered in context - German debt to GDP, Unemployment levels are much lower than their European brethren.

Nail in the coffin of the “Hard Landers”?

Its amazing how quickly the narrative can change in financial markets. Before the recent (positive) US employment report the daily newsfeed was buzzing about the FED being late with interest rate cuts and how it had to cut by at least 50bps. Today, the market is actually pricing in a potential “pause” at the next meeting and at most 0.25%. Put simply, the economic data out of the US continues to defy the Hardliners and may have hammered the final nail in their coffin.

• US economy added 254,000 jobs in September (eclipsing the forecast)
• US economy grew 3% at an annualized rate in the 2nd Qtr
• Purchasers Manager Survey for non-manufacturing was very strong
• The initial jobless claims numbers remain low

Trade wars ratchet up

The tit-for-tat retaliatory action that often characterizes trade wars continued this week with China placing “security deposits” on EU brandy imports. The move follows the EU’s decision to place higher tariffs on imports of Chinese electric vehicles. European luxury goods groups including LVMH, Kering and Hermes all declined in trading. The Chinese economy does not need any additional headwinds as it still reels from the implosion of its debt-fueled property bubble. Consumer confidence remains very weak and expectations of a major fiscal stimulus injection have yet to materialize. A Trump presidency would lead to a harsher trade environment between the worlds two largest economies. The US already sharply raised tariffs on Chinese exports of EV’s, vehicle software and components. Its clear to us that globalization and common trade cooperation is entering a new “less friendly” regime.

Back in the "Hard Place"

Inflation expectations are rising as evidenced by the rise in the 10 year bond yield from 3.63% to 4.11%. The US CPI number released this week also points to "stickier" services inflation which again puts the FED back in the uncomfortable position of potentially stoking a stock market melt-up by cutting rates too quickly. There is growing evidence that the US economy is less interest rate sensitive in this cycle so the impact on the economy of the dramatic interest rate hikes has been over emphasized - i.e. conditions are much easier than predicted and therefore interest policy is less restrictive potentially re-opening the door to inflationary pressures. When you add in labour strikes, oil price rises on geopolitical tension and China (stimulus perhaps?), the road-map gets a bit trickier. Remember the equity market has already priced these rate cuts in - maybe the money market funds know something the equity market doesnt!

Complacently, hurtling towards Catastrophe

The nonsense that "things are escalating" needs to be called out. The situation is increasingly hurtling towards catastrophe. My amateur "war game" goes like this: Israel (backed by US) attacks Iran. Next you have to look at who are Iran's allies - Enter stage left Mr. Putin! Lest I remind the reader that Russia has 1,600 deployed nuclear weapons. The US has more.

“Israel cannot sustain this war for even a day without full US backing both militarily and financially. This is to a large extent a US war. When Netanyahu says at the podium of the United Nations that the long arm of Israel extends across the middle east, he is talking about the US air force and the US military…..

The US is now complicit in what I consider a genocidal action by Israel”.

Prof. Jeffrey Sachs

Record flows “continue” into Money Market Funds!

A money market fund is a fund that invests in very short-term, high-quality debt issued by governments, financial institutions, and highly rated corporates. These funds offer a low level of risk because they invest in low-risk investments like government-backed securities. Money market funds are primarily used to preserve capital, with a high degree of liquidity. The chart above illustrates the rise in flows into these funds (red line) as the US central bank commenced its interest rate hikes (blue line). One would think that these funds would suffer outflows as rates are cut - the opposite is in fact happening with fund flows increasing. My takeaway - Maybe the money market fund knows something the equity market doesnt? Rates are not coming down as quickly as is currently priced in!!

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The opinions expressed in this newsletter are the viewpoint of the author only and do not represent Priya Wealth Management stance on any issue, whether social or political in nature. This newsletter is for informational purposes only and does not constitute advice in relation to any product or service.