Leaning towards "half full"

The Party is over fella’s

Fidelity’s Tom Stevenson used an articulate analogy to describe the hapless marriage of commercial property companies and US regional banks likening the relationship to “two drunks propping each other up”. Unfortunately, it looks like one of those drunks has passed out from excessive quantities of easy money. What happens when two bad actors converge at the intersection of rising rates, “work from home” and increasing construction costs associated with climate change. New York Bank Corp announced during the week that it had notched up $185mn in losses on just two property loans. The Irish commercial property market is not immune either with investors currently facing a moratorium on withdrawals. There is a dangerous assumption that the only financial institutions exposed to expensive commercial property are regional banks!

Short memories and back-slapping galore

Financial commentators like market participants have short memories. There’s a lot of back slapping going around with regards to potential “soft landing”. Premature springs to mind. In late 2021, Federal Reserve Chairman Jerome Powell appeared before a Senate Banking Committee hearing on Capitol Hill. He admitted that the FED had been far too slow in raising rates and persisting with the “transitory” narrative. Could the inverse happen in 2024 with rates kept too high as the central banks grapple with subduing inflation and not choking off the economy. Yes indeed!

China’s headwinds

China has a population bubble that is bursting along with its property mess. A staggering 297 million Chinese are now aged 60 and over. If this 297 million cohort were a country of their own, they would slot in as the fourth largest in the world (see my chart above). Interestingly India has the exact opposite demographics and in simple terms is where China was (demographically) 40 years ago with average ages in the 30's!!Talk about economic headwinds and tailwinds!!

Could “this time” really be different?

It is drilled into us by the financial historians that monetary policy operates with long and variable lags which you discount at your peril. But at what point do the bears throw in the towel here? Those recession warnings will ?eventually be proved right. That’s the business cycle. How much is left on the table whilst waiting for Godot is the conundrum and market timing has a pretty terrible track record. That’s all fine until you realize that at the very point when people like me write about “soft landings” or “no landings” it’s the point of maximum danger. That’s the sentiment cycle. Navigating these cross-currents is the tricky bit!

The expensive scenic route!

It’s definitely too early to run that Inflation victory lap! Last month, both Maersk and BP suspended transits through the Red Sea. What are the implications for global supply chains and inflation? It’s pretty obvious if you study this simple map of the region. If you wish to avoid the Red Sea, your precious cargo is looking at a 5,000-mile “scenic route” around the Cape of Good Hope. All eyes are on oil with prices rising above $80 a barrel. Air freight traffic will inevitably increase as European manufacturers already reporting disruptions to their supply chains.

Leaning towards half full!

The US economy continues to look good. Third Quarter real GDP was above 3%, non-farm business productivity increased significantly, and the trend of declining prices continues. Cutting rates is fraught with both asset and inflation bubbles and Powell knows it. Political pressure will come as the November election looms as will the rising debt interest payments. This week, both the US & UK kept rates at current levels. The markets (both bonds and stocks) became way too euphoric at the tail end of 2023. Since Powell’s last speech (and optimistic tone) surprised many. The markets read it as a clear pivot. We know what has happened since then?

- Stock market broke through all time highs

- Melt up in the big tech names (and I see Cathie Wood is back doing interviews).

- Significant easing of financial conditions (spreads have tightened).

- Oil prices pushing above $80 per barrel as Middle east escalates

- US labor market is very tight with strong job openings in December

What is the incentive to cut rates in this environment especially when the inflation genie is not back in the bottle?

A bastion of hypocrisy

The Masters of the Technology universe made their way to the senate hearings midweek. The body language said it all. They were like five prisoners marching to the gallows. It was a delightful experience watching Zuckerberg squirm his way through that empty apology. Political grandstanding at its best though from the gentleman from South Carolina. He made a beeline for Zuckerberg cutting him to ribbons with the headline grabbing “blood on your hands”. However Lindsay is best known for sermons about “mental health” issues instead of introducing proper gun control legislation. Why hasn't he and his ilk provided robust legislation allowing civil actions against these tech companies - the reality is that politicians/ legislators should be in the dock for their inaction on this incredibly important issue.

European underperformance in context

Former Bridgewater Associates chief investment strategist Rebecca Patterson had an interesting take on the divergence in stock market performance between the US and European equity markets since the 2008 GFC. US exceptionalism was a good strategy between 2009 & 2023 with the S&P500 massively outperforming (5 times) its Euro Stoxx 50 equivalent. It is interesting to note in the convergence in performance in the previous 20 year period. We are familiar with the technology sector bias in the US which super-charged the outperformance. A war in Europe, slowing China and what Patterson calls a "fragmented financial industry" may ensure that the status quo remains.