The state of the world in Q2 2024
Work on progress as always. My current look at the world in a multi asset strategy lense.
A scenario:
- Commodities:
Let’s assume we will see a commodity supply issue and increasing commodity prices overall (5–20%) due to
> Bad Weather (wheat, water, orange juice)
> geopolitical tensions (OPEC, Embargos, Oil and Gas) and stock piling
> Rare metals stock piling and demand front running - Inflation:
We also don’t really see inflation come down
> Labour bargaining keeps on going
> Governments have tax pressures and need income and want higher prices
> Geopolitical tensions and re-shoring adds ot this
> If you want to be devil’s advocate, well, let’s wait for tariffs and trade protection coming back up in Europe and Trump-land - Credits and Rates:
The Credit Cycle must keep pumping:
> QE will stay there to stabilize the risk and “derisk” the banks
> Fiscal expansion will stay there*** to pump asset prices and inflation
> Interest rates stay in “benevolent but nasty” territory so they do not kill the industry but push zombies into their knees - Spreads and Term Structure:
It goes without saying that the above mechanisms of rising inflation and moderate interest rates and rising input factor is stressing P&Ls
and balance sheets and thereby credit risk.
> Zombie / low quality assets will increase credit spread and pay higher yield and add higher default risk. Cash cows like Apple remain lower.
> The refinancing of these guys will remain focused on short term in the hope to avoid locking in moderate rates long-term until they realize it ain’t changing
> That “moment of truth” can only lead to M&A (sell the asset into safe haven), offshoring (move operations into low income country with less regulation) - Taxes and the Sovereign Debt Shield
We are still in MMT territory. Not so mart countries like the EU will keep imitating the regime of e.g. China, India and the US to fix their currencies and hide the PPP meltdown to keep elections smooth, but the whole game really is to restructure into more profitable industries and push bad operating assets into the enemy territory.
> Europe will accept inflation and will harvest more and more taxes this way to pump it into the wrong industries and will further lose the FX game in this process. But leading to M&A and more offshoring.
> US will ideally reshore critical industries and focus on re-industrialization and add trade policies to protect its industries
> The balancing act there is to pressure some companies to move to overseas territories and bind the human capital there I low-margin production activity ideally with lots of headcount.
(The more headcount in these industries and the more automation from AI later, the more people on the street and the more political instability and hence more human capital flowing to the US : ) )
> So while all the west politics looks a bit mental, it really isn’t everyone. But Europe mostly is. And while China and India look like big winners, they are currently accumulating old industries and focus their
capex there. Which will help stabilize FX differentials in the next years - Equity Markets
No, equities will not drop. FX effects may push even bad assets up due to carry trade aspects and allocation pressure and too much powder (credit-cycle based over-existence of liquidity). As always , bear in mind a few things in the equity markets.
1. The Equity Market is only just the tip of the Ice Berg . There are 8 times more private companies. You can neither measure the equity economy nor the distress in it using these assets. They are proxies.
2. The survivorship bias and “attention of liquidity” plays in favor of listed and core equities.
3, Bonds are no longer risk free. Sitting on billions of cash and stable revenues is more like a risk free rate. So lower yield on equities vs. US Stocks if fine. Global blue chips on lots of data with solid sales are
more like alternatives to EU / NAFTA Bonds than equities. Especially if they allocate and expand carefully like Apple does.
4. Even if (shadow) equity markets are down, wealth concentration and liquidity concentration dictates the focal point of equity markets attracts more cash. What you see may be private cash moving into public
equities as a strategy hedge to their defaulting private operating assets.
5, Never think in nominal or real returns, always think in relative wealth. If an investor is not growing faster than anyone else, he is losing money. The ability to pump capable investors into superior wealth
positions is what decides the overall quality of capital allocations inside of the global economy, This has been the case since the stone age. Entrepreneurs allocate capital best. Really good investors are
entrepreneurs that let other people run the businesses they know will work in the specific environment.
So : Be bullish. But tread carefully. Even the super cycle that we see driven by globalization, credit cycle expansion, a very lucky USD stabilization regime (due to policy imitation) and the private-capital-moving-to-public-market effect that pumps our markets right now will not last forever. But right now, Equities should look good.
- FX Markets
FX markets are the hot area of global Macro, because all of the controlled activity in the above contexts need to somehow level out in the FX markets. The more outsourcing the more stability in the Eurodollar markets and trade financing and hence the better the position of the USD if it can continue to crowd out the EUR and CNY. At the same time, the capex deployment and industry restructuring exercises paid for by fiscal deficits affect the sovereign outlook and quality of government and corporate bonds and affect the carry trade mechanisms. So the dynamics here remain questionable but the belief that it plays out has to be there for the other aspects to work .So we will assume the clear picture:
> USD remains strong against most currency pairs especially against the EUR which will suffer under bad regulation and fiscal policy and will increasingly hit a wall. Europe is falling.
> The GBP is somewhat the ugly brother of the EUR and the CHF remains the beauty sister.
> Sanctions will define what happens with the Russians and anyone else who gets on the list and messes with the USD regime, So this may affect also LatAM.
> The southeast asia region and APAC are all driven by geopolitics. As recently seen in the re-awakening of Japan. Is it really a coincidence that they change the interest rate regime, deflate the currency and
now become a more interesting region for new investments insideo the global trade economy? Probably not. This is all trade war related and we will see similar stuff happening in the SE region.
> The Yuan and Rupee are the big question marks and they likely will just play out the way we need them to so that everything remains interesting. For now, the big showdown of India vs China is taking center
stage. India hit with one fraud scandal after the other while China popping up on default, distress and government interference. Meanwhile, the real action os probably somewhere else. Maybe in the Middle
East. Maybe in the Balcans and around the Black Sea. We will find out. - Geopolitical Edge
Not so straight forward. But the thesis really is to use fiscal dollars to trigger all the above. US and China are in strict rivalry, Russia on the side lines, Europe is thrown under the bus, LatAm is trying to get out of its strangehold and SE Asia is overly confident but may find it is lying under 10 pm bus as well. The biggest short play coming up is probably India. But when that bubble pops, nobody knows.
*** Caveat on the fiscal monetary cooperation in case you missed the big picture:
— You pump fiscal dollars into the system in order to restructure core industries
— You push for inflation (labour cost) and high interest (financing rates) to push low performing assets out of the country balance sheet into offshore
— The other countries bind human capital and capex into low margin industries and lose comparative advantage and demographic benefits they might have:
— The perceived industrialization drives consumerism and individualism which kills reproduction and autonomy of the culture and country.
