Hope all goes well… “Happens to me too,” said Teddy, my high school senior, EMT. We were discussing his insane afternoon. I asked if he sometimes steps outside of himself and wonders how he got into a particular situation. We have a similarly wild imagination that I figured leads him to have out of body experiences too. “It happened today on the call. We carried this 260-pound guy down steep, narrow stairs, basically dead. The police helped. He was so heavy. We gave him Narcan. I was lubricating a tube to slide into his nose. That was the trigger for some weird reason, and for a moment I was outside of myself, looking down at the scene, a bit stunned at how I got into the middle of this bizarre situation,” explained my son. “When you bring people back from a fentanyl overdose, most get mad that you pulled them from that state, bliss, buzz, whatever it is. Sometimes they get violent. So you strap them down. But this guy came back pretty chill. Just kind of confused as to why he was with me in an ambulance.”
Overall: “How long to dispose of a body before it smells,” Brian Walshe asked Google. “What is the rate of decomposition of a body found in a plastic bag compared to on a surface in the woods,” was another query that law enforcement retrieved from some faceless server, a virtual witness to his horrific crime. He did not ask, but should have, “Are Google queries retrievable by the FBI.” Instead, he typed 20 questions you definitely should not Google if you want to get away with murder [see here]. On China’s Baidu, queries for baby strollers fell 17% last year and are -41% since 2018. Searches for baby bottles are down by one-third since 2018. But queries for elderly care homes surged 800% last year, faceless servers bearing witness to China’s profound demographic challenge. China’s population surged from 540mm in 1949 to 969mm in 1980 when the One Child policy was introduced. And still, the population climbed inexorably to over 1.41bln in 2021. But in 2022, deaths exceeded births by 850k. UN demographers see China’s population contracting by 100mm by 2050. You could imagine Xi secretly typing, “What is the rate of decline of a nation that shrinks and ages before becoming wealthy.” Japan hit “peak people” in 2011 at 127.4mm. Demographers see it shrinking to 97mm by 2050. Russia is in utter demographic collapse. And you could imagine Putin secretly typing, “How long can a nation remain intact without enough young men to fight.” Europe is on the ageing, shrinking path too, but unlike China, Russia and Japan, immigration still tempers its demographic decline. It’s easy to imagine countless European leaders typing, “How to assimilate the waves of refugees needed to sustain the economy while retaining your culture.” Such demographic decline has never happened across the major global economies. How this impacts geopolitics, economies, and markets remains uncertain. There is no back-test for this. The US continues to be the outlier, growing, albeit slowly. And let’s hope Biden is typing, “How to reverse the opioid/fentanyl/diabetes public health catastrophe that has lowered US life expectancy.” And in India, Google searches for baby bottles jumped 22% last year, while queries for cribs surged 500%.
Marcel Kasumovich, Deputy CIO of One River Digital, published an interesting piece on how inflationary assets appear to be leading the cycle in an atypical way [click here]. We are always on the lookout for market behaviors that appear unusual, aberrant, counterintuitive. Such moves often give us glimpses of new fundamental forces emerging.
Week-in-Review (expressed in YoY terms): Mon: US holiday – quiet markets, BOJ conducted unscheduled JGB buying operation (2x) / JGBs briefly trade above 50bp – top end of YCC band, China allows incoming business travel from Japan and S. Korea to restart, Israel CPI 5.3% (5.4%e), Japan PPI 10.2% (9.5%e), India wholesale prices 4.95% (5.48%e), S&P Closed; Tue: Japan 10y rises above 0.50% for 3rd consecutive day, ECB is considering downshifting to 25bps in Feb according to Bloomberg / Lagarde pushes back on this report, ECB’s Lane expects higher rates but is non-committal on size, China’s population declines for first time since 1960, Singapore non-oil expts -20.6% (-16%e), China IP 1.3% (0.1%e) / ret sales -1.8% (-9%e) / Jobless rate 5.5% (5.9%e) / 4Q GDP 2.9% (1.6%e), UK unemp 3.7% as exp / weekly earnings 6.4% (6.2%e), S. Africa mining production -9% (-6.5%e), Germany ZEW 16.9 (-15e), EU ZEW 16.7 (-23.6p), US empire mfg -32.9 (-8.7e), Canada CPI 6.3% (6.4%e) / Core Trim CPI 5.3% (5.2%e), S&P -0.2%; Wed: BOJ remains on hold - no change to YCC / amended the fund supplying operation to make it applicable for up to 10y (was 2y previously) / hiked the inflation forecast but not as the market expected, Fed’s Bullard says they’re not quite in the restrictive zone yet / sees inflation receding less fast than the market, ECB’s Villeroy says 50bp path is still valid, China’s top economic official Vice Premier Liu said economy likely to rebound to pre-pandemic trend this year, India becomes the most populous country, MSFT to initiate mass layoffs, New Zealand house sales -39% (-36.1%p), Japan machine orders -3.7% (1.6%e), UK CPI 10.5% as exp / Core CPI 6.3% (6.2%e) / RPI 13.4% (13.6%e), Taiwan 4Q GDP -0.86% (1.2%e), S. Africa CPI 7.2% (7.3%e) / Core CPI 4.9% (5.1%e), Taiwan unemp 3.61% (3.65%e), UK house prices 10.3% as exp, US mortgage apps 27.9% WoW (1.2%p), US ret sales -1.1% MoM (0.7%e) / core ret sales -0.7% (-0.3%e), US PPI 6.2% (6.8%e) / Core PPI 5.5% (5.6%e), US housing mkt index 35 (31e), S&P -1.6%; Thu: US reaches debt ceiling ($31.381T) / Yellen announces use of extraordinary measures, Fed’s Brainard reiterates that rates will stay high for longer, ECB’s Lagarde pushes back against slower hiking pace, ECB’s Knot says “won’t stop after a single 50bp hike”, NZ PM Ardern unexpectedly announced that she will step down by 2/7, Lula applied doubt to continued BCB independence and said infl target should be raised, Turkish CB unch as exp, Norges bank unch as exp, Indonesia CB hiked 25bp as exp, Australia emp change -14.6k (25k exp) / unemp 3.5% (3.4%e), HK unemp 3.5% (3.6%e), Brazil unemp 8.1% as exp, US housing starts 1.382m (1.358m exp), US philly fed -8.9 (-11e), US init claims 190k (214k exp), S&P -0.8%; Fri: China kept 1y & 5y Loan Prime Rates unchanged, Japan CPI 4% as exp (41y high) / Core CPI 3% (3.1%e) / JGB’s rallied in continued short squeeze / Kuroda defends easy monetary policy in reaction to the CPI print, SNB’s Jordan says returning infl to 2% is no easy feat and a strong CHF is important, Fed’s Waller says critical to stay the course, Fed’s Harker sees rates above 5%, Google to cut 12k jobs, UK cons conf -45 (-40e) / ret sales -6.1% (-4.4%e), Germany PPI 21.6% (20.7%e), HK CPI 2% (1.9%e), Mexico ret sales 2.4% (2.2%e), US existing home sales 4.02m (3.95m exp), S&P +1.9%.
Weekly Close: S&P 500 -0.7% and VIX +1.50 at +19.85. Nikkei +1.7%, Shanghai +2.2%, Euro Stoxx -0.1%, Bovespa +1.0%, MSCI World -0.4%, and MSCI Emerging +0.6%. USD rose +2.0% vs Brazil, +1.9% vs Russia, +1.8% vs South Africa, +1.4% vs Yen, +1.2% vs China, +0.6% vs Mexico, and +0.1% vs Australia. USD fell -9.4% vs Ethereum, -9.3% vs Bitcoin, -1.4% vs Sterling, -1.0% vs Sweden, -0.6% vs Chile, -0.5% vs Indonesia, -0.3% vs India, -0.2% vs Euro, -0.1% vs Canada, and -0.1% vs Turkey. Gold +0.3%, Silver -1.8%, Oil +1.9%, Copper +0.8%, Iron Ore -2.8%, Corn +0.2%. 10yr Inflation Breakevens (EU -6bps at 2.02%, US +5bps at 2.24%, JP -3bps at 0.63%, and UK -2bps at 3.35%). 2yr Notes -6bps at 4.17% and 10yr Notes -2bps at 3.48%.
2023 Year-to-Date Equity Indexes (high-to-low): Argentina +18.3% priced in US dollars (+22.6% priced in pesos), Mexico +15% priced in US dollars (+11.3% in pesos), Ireland +11.3% in dollars (+9.9% in euros), HK +11.1% (+11.4%), Italy +10.1% (+8.7%), Colombia +10.1% (+4%), Euro Stoxx 50 +9.9% (+8.6%), Philippines +9.8% (+7.5%), Spain +9.7% (+8.4%), Korea +9.5% (+7.1%), France +9.4% (+8.1%), Germany +9.3% (+8%), Czech Republic +8.9% (+6.6%), Hungary +8.8% (+6%), Sweden +8.7% (+7.5%), South Africa +8.7% (+9.3%), Netherlands +8.5% (+7.2%), Australia +8% (+5.9%), Russia +7.6% (+0.6%), China +7.5% (+5.7%), Taiwan +7.1% (+5.6%), Austria +6.8% (+5.5%), UK +6.8% (+4.3%), Canada +6.7% (+5.8%), Greece +6.6% (+5.3%), Poland +6.5% (+5.8%), NASDAQ +6.4%, Thailand +6.4% (+0.5%), New Zealand +6.2% (+4.4%), Russell +6%, Israel +5.7% (+2.4%), Belgium +5.6% (+4.3%), Switzerland +5.2% (+5.3%), MSCI World +4.7% priced in US dollars, Finland +4.5% (+3.2%), Brazil +4% (+2.1%), Malaysia +3.5% (+0.3%), S&P 500 +3.5%, Chile +3.5% (-0.5%), Indonesia +3.4% (+0.4%), Denmark +3% (+1.8%), Singapore +2.8% (+1.3%), Japan +2.8% (+1.8%), Portugal +2.6% (+1.4%), Saudi Arabia +2.1% (+1.9%), India +1.6% (-0.4%), UAE -0.2% (-0.2%), Turkey -0.8% (-0.3%), Norway -1.3% (-0.7%), Venezuela -6.9% (+7.1%).
New (Ab)normal: “After recession, everything will return to normal - that’s how investors are positioned,” said Marcel Kasumovich, the two of us discussing this increasingly unique time in market history. “The fastest Fed tightening in four decades is supposed to bring a deep recession and a lot of broken glass in global markets. Things are playing out differently. Global housing markets cracked. But job markets are holding up. Asset deflation was rampant during the rapid Fed tightening. But emerging markets didn’t crack; UK pensions did and were saved. Regions like Turkey and India led USD equity gains. It isn’t normal.”
New (Ab)normal II: “On QT, we’ve communicated really clearly to the markets about what we’re going to do there,” said Powell. “Markets seem to be okay with it. We’re phasing in.” That was the guidance on June 15, 2022. Only, liquidity conditions are beating to a different drum. Excess reserves in the banking system were $3.189trn at the time of the guidance, having tightened more than $1trn in six months. Liquidity metrics have been stable since then despite QT. Market-based factors are dominating liquidity, not QT. This wasn’t the case in the past.
New (Ab)normal III: “It’s not just US policy,” continued Marcel. “December’s surprise tightening from the Bank of Japan led to an unprecedent expansion of its balance sheet to guard against unwanted increases in bond yields. “This is definitely not a step toward an exit,” Kuroda declared to a market that rushed to the exit signs. The yen surged and held its gains (despite record central bank bond buying). The BOJ now holds more than 50% of government coupon bonds. Maturing bonds more than double this year. No Governor can exit this QE labyrinth.”
New (Ab)normal IV: “Under tremendous international pressure, the US dollar depreciated 53% against the Japanese yen from 1985-1987, leading to low yen rates and an unparalleled property bubble,” said Marcel. “Japan was 11% of world GDP and rising in 1985. It is 4% now and falling. China resisted rapid currency strength having studied these pitfalls. Yet, they mirror Japan in one key area – demographics. China’s population fell by 850K last year, the first since 1960; the working-age population is projected to shrink 216 million through 2050 – unprecedented.”
New (Ab)normal V: “Cyclical gyrations will confound structural megatrends,” said Marcel. “A pragmatist emerged after China’s Party Congress with President Xi ending COVID lockdowns. Global trade will be instantly impacted. Just bringing China oil demand to pre-COVID trends would take 2% of world production at a time when supplies are tight – commercial inventories are at historic lows.” In the past four cycles, the median oil price was $40 at the end of recession. It’s double that now when the global economy is bottoming. “The past isn’t the present.”
New (Ab)normal VI: “This comes at a time when markets are convinced US inflation is dead,” said Marcel. “Markets are pricing inflation of 2.3% this year, and close to 2% for the next decade – just like normal. The Fed won. But is it a battle or a war? Oil prices and inflation assets are never leading indicators in market recoveries – they are now. The US dollar has stayed strong-for-long in recession – it’s been trending lower for four months.” The pandemic exposed weak links in the global economy – strained supply chains. Inflation is retreating. “Inflation assets indicate it’s a war.”
New (Ab)normal VII: “Generational imbalances are pressing, the root of lasting geopolitical and social conflict,” said Marcel. “Rich countries are accustomed to external conflict, but the economic war is building from within. Since 1990, a period of extraordinary prosperity, US student debt for households under the age of 35 has increased nearly 10-times. The older generation promised an extrapolation of good times; they charged the younger ones a handsome peacetime premium for that privilege. It’s an invisible generational default.”
Anecdote: They say history may not repeat, but it does rhyme. Perhaps. But when it comes to trading and investing, it is more helpful to recognize that the world is always different, forever changing, and the only constant is human nature, behavior, fear, greed. Our capacity for both savagery and selflessness has not changed since we lit our first fire. It may even be that nothing about who we are as creatures has changed since we stood upright. But nearly every material aspect of our existence has evolved to be unrecognizable to our early selves. By saying that history rhymes, it suggests it should be rather easy to anticipate the future, when in fact this is rarely the case. When others convince themselves that something is easy, when it is fact not, opportunities inevitably arise as those people make mistakes of overconfidence. So if we treat each moment as unique, and we then think about how our unchanging human nature may respond to this new moment, it is more likely that we will have an edge over those looking for rhymes. People say the rise of China and its conflict with the US may rhyme with the ancient war between Athens and Sparta that Thucydides chronicled in 400 BC. Maybe. No doubt it is interesting to explore the potential for parallels. But the starting point should surely be to recognize that in modern nations with 1000x more people, mobile phones, social media apps, and nuclear weapons, the likelihood of a repeat, not to mention a close rhyme, should not be the assumed starting point. Nor should we think that by analyzing post-war economic cycles, when populations were young and expanding, the world was frantically globalizing, and entitlement promises were easily met, that we can expect our future cycles to repeat, let alone rhyme. That is not to say that everything, will always be different, or opposite. But in a world that is aging, deglobalizing, and being forced to face up to its unpayable promises, the starting point for looking at today’s cycle, should surely not be to look for rhymes from the past.
Good luck out there,
Chief Investment Officer
One River Asset Management
Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, converse with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.