6 Feb 2024
Global Geo-political and Macro-economic Update
Welcome to 2024 and we wish everyone a successful and happy year.
The Israeli/Hamas war is drawing in more actors, notably the Houthis in Yemen who are disrupting shipping in the Red Sea with Hezbollah continuing to trade missiles with Israel. More recently there have been attacks on US bases in Syria, Iraq and Jordan by different militants with the US and UK responding. Some ships are now being diverted around Cape Horn which is increasing the cost of shipping. If Iran is drawn in there is a very real risk that the Straits of Hormuz and the oil trade will be severely disrupted which will drive up the price of oil. As outlined in newsletter dated 27 October 2023, the world could easily be stumbling into a major conflict.
This is a US Presidential election year, and we see US domestic politics as a major risk to the world, as the US is on the cusp of imploding. If Donald Trump wins the Republican nomination, then the power and support of the Republican Party will swing behind him. President Biden at times sounds incoherent which raises questions about his mental health. The Democrats are worried that a President Trump will set the Department of Justice (DOJ) after Biden and his colleagues in a tit for tat scenario. Subject to the 14th Amendment which is limited to “treason”, there is no constitutional or legal impediments for electing a convicted felon as president, so given the number of criminal matters in train against Trump, there is the possibility that a convicted felon is elected president.
Domestically, the US has lost its way as the art of compromise which used to be a strength of US Congress is no longer the case. Equally, the US global influence (soft power) is waning as the Global South is rejecting neo-liberal values because they are being selectively applied. This is best illustrated in the different responses of the West to the Ukraine/Russia war and the Israeli/Palestinian conflict.
The Ukrainian summer offensive was a failure, and the US wants the European NATO members to do the running on this conflict. Russia’s weapons supply is not being degraded because the war is being fought on Ukraine territory. It appears a stale mate has been reached.
In the time between the BRICs conference in South Africa in August 2023, when an invitation was extended to Argentina to join BRICS, starting from 1 January 2024, Argentina had a change in government where the people elected a right leaning party. The new Argentina government has declined for the moment the invitation to join BRICs. It will be interesting to see whether this takes the wind out of BRICs or is just a temporary setback.
As mentioned previously fiscal (loose) and monetary (tightening) policies are working against each other, as governments wish to keep their economies vibrant while central banks are attempting to rein in inflation. Industries that rely on issuing debt or equity are hurting, e.g. property, but those in technology, e.g. Apple are doing very well. Purchasing Managers Indices (PMI) appear to have stabilised, whereas liquidity indicators have tightened. Mixed economic signals are making it very hard to determine where the global economy is heading.
Equity markets are getting ahead of themselves with equities in the period from November 2023 running up fast and now pulling back as the possibility of rates cut appear to have retreated. Over the last 18 months the equities markets have bet 7 times that the US Federal Reserve will pivot, and each time they were wrong. Some analysts late in 2023 were predicting 5-7 interest rate cuts in 2024. This appears very unlikely, subject to a major event.
The Reserve Bank of Australia (RBA) does not want to super charge the residential property market by reducing rates too soon, as the market is hot enough already, as reflected in the high numbers attending open houses on Saturday, 3 February 2024. It is reported that top end properties are taking longer to sell and price reductions are quietly occurring, if correct this will flow through to the rest of the market. Another good economic weathervane is the prices of historic prestige cars have fallen about 25%, as owners cashout.
China’s central bank has announced a 50bps point cut its RRR rate (the rate the Chinese Central Bank requires commercial banks to hold in cash as reserves). As we all know the theory is that banks can lend more, and cuts are aimed at being stimulatory. This theory does not work in practice because when banks are worried about the macro-economic environment (note the recent collapse of Evergrande owing USD300 billion) it normally results in tougher lending standards, so lending slows. The cuts have exactly the opposite effect to what a government wants.
We have previously outlined the de-coupling of the US and China and of course this will take a long time, although we expect there will always be some level of interdependency. This de-coupling is now showing up in key metrics revealing that China is no longer the US’s major trading partner. This is now Mexico. Consistent with this de-globalisation, world trade is shrinking, and this only happens in recessions. There are now sectoral recessions, e.g., in commercial and retail property and in commodities e.g. Nickel and Lithium prices have crashed despite the increasing demand for semi-conductors. On the positive side consumers are spending on holidays, entertainment, small-scale consumer goods, and on gambling. A newsagency reported to us that in the days before the $200m Powerball they have never been busier with individuals and syndicates making large bets. This is helping drive the economy.
Two different surveys on US employment figures were released in January 2024. One showed that 1.5m full time jobs were lost while another survey showed 220,000 full time jobs created. Which is right?
The S&P 500 has hit a record high, however, only 190 of the 503 stocks in S&P 500 are in positive territory in 2024, the other 313 stocks are in negative territory. A breakdown of the index shows most of the gains have come from the so called, “Magnificent 7” (Amazon, Tesla, Nvidia, Apple, Microsoft, Alphabet and Meta). The Magnificent 7 is not representative of the market itself and its important to understand that market liquidity does not scale with size. In the Russell 2000, since January 2023, 871 stocks prices have increased which is less than half the majority (1029) which have fallen. A good guide to the health of equities markets is market breadth (width) which is when more stocks are increasing in value than falling in value, as it indicates that investors are betting on finding the next “big” winner. Currently, investors are only willing to bet on sure things, even if the Price Earnings multiples are at historic highs.
As always, we are available to discuss investment and debt strategies, so please feel free to reach out.
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