The Week That Matters (1st-5th April, 2024)
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill
The job number doesn’t matter.
There really hasn’t been a growth scare yet anywhere in the world. On the contrary, the stats on the state of the global economy continue to be, for the most part, positive: China PMI, US ISM, Germany’s IFO index, Citigroup Economic Surprise Index. Europe has also surprised recently on the company front. Sweden’s Volvo, for example, had a record single-month of sales in March.
The improving breadth in the market is a sign it is becoming more comfortable with a soft landing. European value stocks, for example, have caught a bid while the Russell 2000 looks like it may break out. Would that happen if we were going into a recession?
Goldman Sachs’ timely reiteration of its bullish stance on energy and commodity names two weeks ago seemed to encourage buying in the space. And lagging markets like South Korea are finally getting some attention from overseas fund managers. If you are a PM, do you add to Micron or buy Samsung Electronics here?
This week’s job number is therefore no big deal. It is more of the same. If anything, it might increase the neutral rate a tad, if you believe in that economic mumbo jumbo, but it shouldn’t impact monetary policy that much. Importantly, it doesn’t rule out, in any way, a rate cut in June.
As the chart shows, jobs growth has been running well above 200,000 for the last year while wage growth has moderated. The mythical 1970s style wage spiral has not happened and that’s the crucial bullet point. There is no inflation without wage inflation. If that’s not clear, just look at the role wages play in Japan’s attempt to get out of its deflationary hole.
Focus on the CPI print.
What matters is the CPI print that will come mid-month. Sentiment will be driven by that number alone. If it’s a third month of disappointment, we might have a rough ride for a few weeks. If it shows we are heading towards the arbitrary 2% figure that pundits love, then things might pick up again.
This newsletter has been a massive bull since September of 2023, but the author feels the likelihood of a meaningful correction is increasing. The CPI reading depends on the shelter component now. We need that to come down. Live time data suggests it should, but the Fed’s measurements might not reflect the reality on the 15th of this month. They use such poor data.
Separately, commodity prices have risen. That tends to bring the “inflationistas” (those obsessed with a 1970s style inflation scenario) out in full force. And that’s never good. They are misguided of course. Remember how worried everyone got about lumber prices in 2021? It turns out when prices are high, lumberjacks get busy. Isn’t that the same for most commodities?
And sadly, the situation in the Middle East is critical. This newsletter has argued that inflation is in the rear-view mirror for a long time, but it will concede that an energy shock is the only thing that would bring it back. It definitely won’t be wages! (See golden cross on crude below).
The author, consequently, isn’t adding to any positions in the US and has sold some non-core positions. The only place he is busy is in the small and mid-cap space in Japan, which has so many cheap names. He also bought a beaten-up copper explorer in Oz (small position but could trade like an option). That’s it.
The need to make room for others
We all need to feel relevant. Relevance builds our sense of identity. It gives us a reason to exist. It’s also a perfectly natural desire to want your life’s work to mean something. Most of us want to leave a legacy.
Unfortunately, the need to feel relevant or leave a legacy means people often linger on for too long in an institution or in public life. This phenomenon, as way of an example, is evident in succession planning. People tend to put it off because of the fear of losing relevance.
The Founders of KKR may have passed on the torch incredibly well but that’s the exception. Most people are like Warren Buffet, who took way too long to find a successor or are like Ray Dalio, who just can’t quit the conference circuit.
Aging may be a cruel process, but it is a necessary one. At some point, you must find the strength to move on from being the person in the thick of things to someone who might be able to contribute in different ways.
Overstaying your welcome has become a huge problem in politics. The West used to laugh at Japanese officials in their seventies or eighties being central to Japan’s economic and political decisions during the 1990s and 2000s. The Japanese Diet, Japan’s version of a parliament, was even called a retirement home by the foreign press. It’s ironic then that the US Congress would resemble a retirement home only 10-20 years later, with the average age of its members being way over sixty! Nancy Pelosi is 84!
It’s not just politics where it would be better for older participants to take a step back gracefully. This newsletter has argued before that the world’s vast capital reserves would be better served if there was a retirement age for fund managers. Asset allocators like Norges love a brand. The brand provides the person signing off on the investment job security. Performance is often a secondary consideration. The opportunity cost of capital is rarely discussed.
Unfortunately, the pursuit of a brand over anything else means allocators keep funding old timers like Ray Dalio or Jeremy Grantham, who have been rubbish for two straight decades now. Branded funds just get bigger while fresh new investment talent doesn’t stand a chance. Instead, it gets crowded out by people who should be with their grandchildren or their third wives, who apparently love them so. New talent has no choice but to join Millennium or Point 72.
Larry Summers: it’s time to retire.
This brings the author to Larry Summers, a man who should be considering retirement by now. Larry Summers is a special case in many ways. He is not a politician. He is not a risk manager. He is not even a civil servant. He is a non-elected “advisor,” who has been knocking around the corridors of power since the early 1980s (the Reagan administration). He is the Henry Kissinger of economics (thankfully without the war crimes)!
Summers by all accounts is brilliant in a book smart kind of way. He won the John Bates Clark Medal, which is given to the nation’s best economist every two years. The author has no idea whether that’s a political prize or one that requires friends in prominent places, which Summers has (he has two Uncles who are Nobel laureats), but presumably you can’t be a dummy to get it.
It’s in the real world where he seems to stumble. His accident-prone tenure at Harvard is legendary. The author asks the reader this simple question. How did he not get cancelled and his career end for saying women can’t keep up with men on STEM subjects because of genetics when one of the great entrepreneurs of our time, JK Rowling, gets cancelled because she noted a man is a man and a woman is a woman? Woke thinking is so confusing. Remember he was in charge of Harvard University at the time!
A horrible track record.
In public office, his track record is arguably worse, to be fair. Like Alan Greenspan, who by many accounts wanted to be an investment banker, he was in awe of the Treasury Secretary of the Clinton administration, Robert Rubin. Robert Rubin was a brilliant financier and a Goldman alum.
In the 1990s, under Rubin, he took it upon himself to use American influence to get Asian countries and the former Soviet Union to open up rapidly. As a result, he has his fingerprints all over the Asian Financial Crisis of the 1990s and the rise of Putin after the chaos his policies caused in the former Soviet Union during the 1990s. At least, Jeffrey Sachs, the economist, has admitted his error there. Like a sociopath, Summers has admitted no wrong.
He also demonstrated his admiration for Wall Street by supporting the deregulation of derivatives of the 1990s, which laid the seed for the financial crisis of 2008. He famously berated Brooksley Born, the lonely official who foresaw the danger of derivatives. In the book, 13 Bankers, it was claimed he said to her, “I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.” Those are the words of a kid who just wants to be liked by the cool kids. It’s kind of pathetic.
Despite all this, he landed a job as Head of Obama’s National Economic Council. Perversely, this meant he was one of the key people in charge of cleaning up the mess of 2008, a crisis he had some culpability in. The truth is stranger than fiction almost always, no?
Thankfully, Paul Krugman, a man the author respects a great deal, was on the scene and managed to convince Obama to ignore Summers’ call for austerity and embrace a full-blown recovery package. Summers, who has been seeing inflation in every nook and cranny since the early 1980s, claimed it would be massively inflationary in his dystopian way. Krugman said deflation was the key risk. Krugman was right. Isn’t he always?
The author was pleased when Summers got rejected by the Fed. He is no match to Janet Yellen. And one wonders what would have happened in 2020, if he had been Fed Chair. We stood on a deflationary cliff. It needed quick action. Steve Mnuchin and Jerome Powell delivered. Larry Summers would have messed it up.
More recently, he has spent his time appearing on media, denying his friendship with Jeffrey Epstein and claiming stagflation was just around the corner. In a desperate attempt to be relevant, he wrote a report with the National Economic Research Institute claiming the 2022 print was actually double what it was reported as! It was somewhat annoying, but it was harmless.
Open AI
And then, out of the blue, towards the end of last year, he gets a seat on the board of Open AI. Some people get all the breaks, it would seem. As Churchill said, “success is going from one failure to another without losing your enthusiasm.” That approach worked for Churchill. It worked for someone like Lord Mountbatten. It seems it works for Larry Summers too.
The big question is of course is he really the right man for the job? There is no evidence that he is technologically literate. On the contrary, his statements over the last 30 years suggest he is a bit of a luddite. And he tends to be pro-deregulation at the very time when complex discussions are needed about how we regulate some aspects of artificial intelligence. President Xi can be criticized for a lot of things, but his administration knew the importance of guidelines for this technology. Europe, to be fair, seem aware too. The pseudo-libertarian Silicon Valley cult is delaying it in the US as they did with the issue of privacy. It won’t be bankers who tell Larry Summers what to think now. It will be people like Peter Thiel.
Most recently, he argued that AI could replace all forms of human labor. It’s an interesting perspective, but it adds little and is typical of his dystopian statements. If that’s the case, we need careful thinking through the problem. We don’t just need fearmongering.
For the author, he is a classic example of someone, who should retire gracefully and count his gold coins. It is time for him to resign from his post and let someone else have a crack at being on the board of what could be one of the most important companies of our lifetimes.
As always, thanks for reading. I wish you the very best in trading, business and family this risk. Don’t be too brave. Things might be a bit tricky over the next few weeks. (Not financial advice)
Best regards
Mateen
Thx. Mate. Hopefully the copper plays will work out.