Pyrrhic Victories

From politics to the economy, not all battles have clear victors

“If we are victorious in one more battle [...], we shall be utterly ruined.” - Plutarch        

This is Plutarch quoting Pyrrhus, Greek king of Epirus, after he won the battle of Asculum in 279 BC against Roman troops, which left his armies completely depleted. Pyrrhus had been called by the Greek provinces of southern Italy to fight back the rise of Rome. This “victory” ultimately led to the final defeat of Pyrrhus in 275 BC, and gave way to the expansion of the Roman Empire until its apogee in 116 AD. The rest is history.

A Pyrrhic victory is a win that comes at such an expense that it is tantamount to defeat. We had many of such victories lately.

First in politics. The landslide victory by Labour over the Conservatives in the UK is not so much the testament of Keir Starmer’s superior political agenda, as the sheer decrepitude of the Conservative party. After 5 Prime Ministers since Brexit, the lack of GDP growth at 0.1% in 2023, plummeting productivity, and dis-investment in basic services such as NHS have left the country reeling.

Likewise, I am not sure there is so much to smile about in the light of the imminent victory of Trump or Biden in the US, and Marine Le Pen or its nemesis Melanchon in France. All of these choices are built on partisanship and discontent for the alternatives, rather than an active choice for better economic planning. Whoever the “winners” are, fringe politics will make consensus hard and the whole country will end up being the net loser.

Secondly, on the economic front. The relentless fight over inflation has led to increase rates to the highest in 20 years. While inflation is coming down economic data are now starting to roll over too, with slowing job growth, rising unemployment, and contraction of both manufacturing and services ISM in Jun24.

Rekindling global trade has been harder. At last, container rates are climbing again after a brutal drop in late 2022 and 2023. A victory lap then? Well, it is more suggestive of the disruption in freight rates linked to red sea attacks, and increased cost of insurance. This would ultimately translate into higher consumer prices.

Consumers have rejoiced about declining inflation, but delinquency rates for consumer loans, auto loans and credit cards have increased to 12-year high, and should in all likelihood get worse under the scissor effect of higher-for-longer rates and rising unemployment.

Thirdly, technology is a zero-sum game for some. While everybody is heralding an everything-AI future of improved productivity, and profitability for all, the real beneficiaries are mostly GPU/chip, and cloud computing providers. Goldman Sachs index tracking those companies that have “the largest estimated potential change to baseline earnings from ai adoption via increased productivity”. The latter has been fantastically flat since AI erupted in our day-to-day. ˉ\_(ツ)_/ˉ

Lastly, those victories that look like losses are visible across markets too. The prevalence of “quality” over value has made large companies with great profits and sound balance sheets the clear winners. However, such win has been at the expense of smaller companies that still struggle under higher rates and lackluster expansion prospects. Over the past 3 years, small caps value are trailing large cap growth companies by ~40%.

Large Tech are singlehandedly driving the performance of S&P500. Such attraction for “prime” has allowed the gifted few to tap the debt demand of willing lenders too. As a result, their financing walls dissipated, and their balance sheet became even slicker.

The flipside is that the bottom of the pile junk-rated companies were denied such opportunities. On the one hand, it is an occasion of a reset from cheap money go-go years, but on the other it means that the end of the road will come soon for those.

Looking outward too, the stubborn strength of the US economy and the US dollar have sent other world economies scrambling. Some are already throwing the towel by cutting interest rates, while others like Japan or China have seen their currencies declining in value.

Investors would be unwise to venture outside the “quality” trade when strong currents are pushing it upstream, both across equities and fixed income. However, the accumulation of wins for this isolated portion of the market is drying out liquidity, and create desperation elsewhere. At some point it would backfire.

Pyrrus comes from Greek Pyrrhos, derived from Pyr (fire) and -ros (pertaining to). Here it looks like the victory of some is burning the ground for the rest of us.

Stay safe out there !

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Sources -

Can Britain’s economy grow as fast as it needs to - The Economist

Quality Income - Your Investment Briefing podcast

AI technology revolution? - The Economist