The Week That Matters (15th-19th Jan, 2024)
"Optimism is the faith that leads to achievement." Helen Keller
Recession - Waiting for Godot
Read any market commentary from 2009 by financial titans like Ray Dalio, Howard Marks and Stanley Druckenmiller, and you might understand why they underperformed for most of the 2010s. Like today, they couldn’t see what could go right. Due to their age or perhaps, because they were already rich, they could only see what could go wrong.
In 2009, they kept believing in the head fake. The market recovery that had begun in February 2009 was bound to stall, according to them. It was just a matter of time. As in the famous play by Samuel Beckett, however, the downdraft in the market, like Godot, never came.
It would seem judging by what happened Friday that the much-anticipated recession is still nowhere to be seen. The Michigan Consumer Sentiment Index climbed by 13%! That is its highest point since July 2021. At the same time, inflation expectations continued to decline.
This newsletter has stressed on countless occasions that the people who played for the recovery in 2009 (Tepper and Soros) made a lot more money than the people who got 2008 right (Burry). It has argued for over two years now that it will pay to be bullish risk assets over the next few years, perhaps for the rest of the decade.
For the author, 2024 will be like 2010. Rate cuts are a certainty at some point, which will drive a capex boom, especially in IT spend. And it will soon dawn on everyone that we live in a Victorian Age for technology. (Cathie Wood has a point!) Everyone who is talking about the laggards (EM, small caps in the US, China) is not comprehending this and will underperform. In an environment of falling rates, lower inflation and lower growth, large cap tech compounders will continue to do well as they did before Covid. And in a world of AI, scale matters above everything else. Think Uber. Think Google. Think Apple.
Semiconductors and Housing
Markets tend to be driven by cycles. And Wall Street strategists still, for the most part, do not have enough imagination or guts to understand what could go right with certain cyclical areas of the economy. The semiconductor industry is a good example. TSMC’s earnings on Friday confirm the post Covid semiconductor slowdown is now firmly in the rear-view mirror. To be fair, hasn’t TSMC been saying that since at least September of 2023? The big question is what happens to stocks like AMAT now? Did anyone notice SMCI on Friday? The author thinks it’s still cheap (non financial advice).
But tech is not the only show in town. Ed Hyman said housing would be the Nasdaq of the 2000s. He was right. The author believes housing will be great this decade too. The Japanese homebuilder, Sekisui House, paid a lot of money (USD$4.9bn) last week for US homebuilder, MDC, for a reason. There is a MASSIVE shortage of houses EVERYWHERE!
With all that being said, if you are not already long, you might want to time your entry point. At the end of 2022, it was almost impossible to find a strategist who talked positively about what could happen to equity markets in 2023. The street, with few exceptions, was overwhelmingly bearish. Sentiment was markedly different over the Christmas period at the end of 2023. It was hard to find anyone, who was bearish, to be fair.
It will be interesting to see whether some of the strategists change their tune over the next 6 weeks, as things might get volatile in the short term. Markets have travelled well of late, but we are due some turbulence. January and February tend to see elevated inflation prints for seasonal reasons. And a growth scare is always possible. Aren't we starting to see signs of collateral damage from Powell’s embrace of Volcker (Macy’s job cuts?).
The author thinks it therefore pays to be cautious until mid to late February, when some of those strategists, who recently got bullish, trim their forecasts. They can be a fickle bunch.
“Teach a parrot the terms ‘supply and demand’ and you have an economist.”
The ECB President, Christine Lagarde, described economists at Davos this week as being “a tribal clique.” She has a point. Like other areas relating to investment (venture comes to mind), the economics industry is a cozy echo-chamber, where the lazy consensus is preferred over rigorous critical thinking. The biggest sin for an economist is to rock the boat. The biggest virtue is to be invited to the next conference. It’s a club and most of us aren’t in it.
Lagarde also criticized economists for having “a blind faith” in their models. Again, she has a point. As John King noted, “mainstream macroeconomic theory is wrong, and it has pernicious consequences when used as the basis for economic policy.” There are many examples where economist models seem detached from reality but their approach to inflation seems to be the most flawed. Why does raising rates mean landlords will reduce rents? Won’t it mean the opposite? And how does monetary policy impact healthcare costs? Don’t Congress or the FTC need to get involved to fix that burning issue? Central Banks won’t have any impact whatsoever.
Unfortunately, Lagarde’s own track record has been dismal. She might be trying to distance herself from the economics industry by pointing out she trained as a lawyer, but for the last few years, she, like most people working within the closeted world of central banking, has presented neoclassical economics as the sole viable theory of economics. It isn’t.
We are about to see the economic and political consequences of believing that monetary/neoclassical policy is the only way to solve issues in the economy. The inflation we have seen since Covid was always going to be transitory. Raising rates rapidly, the way a lot of Central Banks have, has caused a lot of issues under the surface that will start emerging soon. And it has disproportionately affected the working poor (job loss) and the middle class (higher mortgage payments) as it did in the early 1980s. That's why Ronald Reagan hated Volcker.
In 2016, Lagarde’s predecessor Mario Draghi was blamed for the rise of the “anti-European” German party, the AfD, due to his austerity policies. Will Lagarde have some responsibility for their success in the German elections in October and the volatility it causes in European credit later this year? The author thinks she might even be forced to resign!
Why KKR is right about ambitious people needing to learn Japanese?
Senior management at KKR told new recruits in New York to learn Japanese if they wanted a big career in the company apparently. The story made the rounds in the Japanese press last week.
It has sucked being a Japanologist (Japan specialist) for the last 25 years. There has always been a feeling you placed the wrong bet. Mandarin speakers got all the attention and the swanky jobs. But as China goes into a deflationary hole, similar to what Japan faced from 1990-2003, and Japan makes progress with structural reform, it might be a Golden Age for those who bothered to learn the complexity of the Japanese language.
The author was in Japan all last week, meeting companies, funds and tech entrepreneurs to see for himself what is going on. His sense is there is a new energy in Japan. When he left Japan for the USA in 2011, Japan was in the dead zone. In 2012/2013, the deceased Prime Minister, Shinzo Abe, and BOJ Governor, Haruhiko Kuroda, bravely resuscitated Japan with their Three Arrow Policy. Structural reform, one of the Three Arrows, took time to materialize but there are now clear signs that important reform is progressing and the country is recovering its joie-de-vivre.
The surprising thing for the author is most offices do not have a picture of Shinzo Abe on their wall. He was the greatest leader of the 21st Century thus far in the author’s opinion. The press often describe him as a Japanese Ronald Reagan but he is so much more. Reagan was groomed by the families who lost out in the New Deal of the 1930s such as the Bloomingdales (Nancy used to party with them in the 1960s). Ronald Reagan was an impressive orator and had a great turn of phrase but he was much more of a mouthpiece for a movement behind the scenes, as was Milton Friedman. For Abe san, it was much more visceral. His own family had played a role in Japan’s recovery from the Second World War. He knew something drastic needed to be done to “Make Japan Great Again!”
One focus to get out of the deflationary hole Japan found itself in was trying to increase wages. Abe san and Kuroda san knew there would be no consistent increase in prices without wage inflation. Wages matter and the strategic push by the government in collaboration with the unions and the corporates has worked and will continue to work. Wait for more signs that consumption is picking up later in the year.
Finally, the author was left with two lasting impressions. Corporate formations are skyrocketing and there is a renewed sense of entrepreneurship amongst the young. That is a sea change from before. In the early 2000s, young Japanese people were lost or depressed. Today, the ones the author met seem optimistic about what they can achieve. That, as always, can make all the difference for a nation. Young, optimistic risk takers make things happen. As Helen Keller also said, “nothing can be done without hope and confidence.” Old rich guys allocating their coins to yielding financial products make countries stagnate.
Secondly, the author does not believe The Three Arrow Policy was done in insolation. The Oxford-educated former BOJ governor, Haruhiko Kuroda, undoubtedly spoke with the likes of Ben Bernanke and Janet Yellen throughout the process. It is the author’s belief that at some point this decade the US will have a similar top-down driven policy, a New Deal of sorts, to get the US economy working optimally again. We are about to appreciate that deflation and low growth are the real issues facing the world and those problems cannot be solved with neoclassical/monetarist policies alone.
As always, thanks for reading and thank you for all the support last year. I am looking forward to catching up with many of you this year. I wish the very best for 2024 to you and your families.
Best regards
Mateen
DISCLAIMER: None of this is financial advice. The opinions expressed are purely my own opinions and it is imperative for you to do your own research. They do not represent the views of any company I am associated with
I am watching Japan closely, as you say there is a renewed sense of hope. One of the things that is also happening is the increase of share buybacks. As we discussed when we spoke, it would be very healthy if the execution of these buybacks were done with the interests of the holding shareholder in mind unlike a lot in the US and EU/UK. Regards Mike