The more markets rise, the greater is the gap to consumer sentiment
We are used to explaining this in terms of a K-shaped economy
But together with record profit share and margins and the narrowness of the equity rally, it is also consistent with monopolization, regulatory capture and enshittification
This helps explain why not only labour but also consumers are suffering, implies a critical role for politics – and ultimately paints a more fragile picture of society collapsing towards technofeudalism
Markets are reeling from a monetary triple whammy: repo tightness, a faltering of other forms of credit creation, and a record $900bn in reserves drainage
But all these sources of monetary tightness ought to ease
The question is whether this episode drives a more enduring reduction in risk appetite and fund flows
In a narrow technical sense, the FOMC was indeed hawkish
But in the cessation of QT and through questions, it more broadly reconfirmed a reaction function at once deeply asymmetric and completely oblivious to asset price inflation
This paves the way for a further melt-up in risk assets and havens – and for more assets to exhibit the sort of exponential sawtooth boom-bust recently seen in gold
The single greatest force driving modern economies, society and politics is scalability
It is the common narrative underlying the dominance of big tech, through to the teen mental health crisis and the rise of political polarization and populism
Markets tend to treat scale as a largely linear concept
But human systems change character at scale – and ultimately have breaking points
Clients with Group Webinar or One-on-One subscriptions should log in to see the full version
The single greatest force driving modern economies, society and politics is scalability
It is the common narrative underlying the dominance of big tech, through to the teen mental health crisis and the rise of political polarization and populism
Markets tend to treat scale as a largely linear concept
But human systems change character at scale – and ultimately have breaking points
Open to clients with Group Webinar or One-on-One subscriptions, and to the press
The single greatest force driving modern economies, society and politics is scalability
It is the common narrative underlying the dominance of big tech, through to the teen mental health crisis and the rise of political polarization and populism
Markets tend to treat scale as a largely linear concept
But human systems change character at scale – and ultimately have breaking points
It is remarkable that proposals for a Mar-a-Lago accord have not yet sparked an even greater flight out of US dollars, debt, and risk
That they have not yet done so is thanks to a mix of incredulity, inertia, and temporary liquidity factors
Current account deficits, though a source of vulnerability, are in many respects a measure of attractiveness to foreign capital
What’s damaging is when – as in the US – they are allowed to turn into ever-escalating debt
What the Mar-a-Lago proposals’ discussion of sticks and carrots lacks is a proper notion of trust – and of the scale and suddennness of the consequences once it has been lost
Markets’ response to the evident risks has thus far consisted primarily of risk rotation
This seems increasingly likely to evolve into full-fledged risk reduction
That it has not done so to date is thanks not only to dwindling hopes that Trump is bluffing, but also (yet again) to support from central bank liquidity
It is tempting to look at the performance of US equities in 2H24 and conclude that central bank liquidity no longer matters for markets
But a closer examination of both other markets and shorter timescales suggests this would be a mistake
It instead highlights the predominant role currently being played by fund flows and US exceptionalism
While it is possible to paint scenarios where liquidity contributes to a melt-up in risk in early 2025, on balance we see it as one of a number of reasons to be skeptical of the bullish consensus
Trump’s triumph is testament not only to the inadequacies of the Democratic campaign and the electorate’s dislike of inflation, but to the popularity of populism globally
Trump trades likely to continue at least until inauguration, and conceivably thereafter – unless a bond rout stops them first
The right places to position are America-first trades which will benefit from – or at least withstand – higher term premia
The significance of last week’s FOMC lies neither with the rate view, nor with the earlier, larger taper of QT – mildly bullish though both of these are.
It comes instead from the stark asymmetry of the response function which was described.
While the true test remains with the details of the liquidity outlook, in conjunction with the Treasury refunding this opens the door to a continued cross-asset rally through Q2.
The exuberance in risk assets is less a consequence of a stronger economy than a driver of it
The expectation of rate easing was never critical – which is why the exuberance has largely persisted even as yields have backed up
It is instead the direct consequence of investor crowding following easy central bank balance sheet policy – and vulnerable to any reduction in CB liquidity
The exuberance in risk assets is less a consequence of a stronger economy than a driver of it
The expectation of rate easing was never critical – which is why the exuberance has largely persisted even as yields have backed up
It is instead the direct consequence of investor crowding following easy central bank balance sheet policy – and vulnerable to any reduction in CB liquidity
Open to clients with Group Webinar or One-on-One subscriptions, and to the press
Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers’ strikes against a backdrop of fiscal indiscipline?
Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers’ strikes against a backdrop of fiscal indiscipline?
Open to clients with Group Webinar or One-on-One subscriptions
Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers’ strikes against a backdrop of fiscal indiscipline?
Open to clients with Group Webinar or One-on-One subscriptions, and to the press
Net capital outflows from China have accelerated sharply in recent months
They are now running at a near-2015 rate
The only real source of ‘inflows’ is a drop in prior foreign lending by domestic banks as they divert capital onshore – but even this can be interpreted as a sign of vulnerability
