Monday, Jan 22, 2024

geopolitics vs earnings, bitcoin blues, the space and metaverse races

“There is all the difference in the world between treating people equally and attempting to make them equal.” – Friedrich Hayek   ||

Hello everyone! I hope you all had a great weekend, and found some time to touch grass, appreciate the sky and tell special people that you love them. 😊

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IN THIS NEWSLETTER:

• Geopolitical risk and economic data

• Bitcoin blues

• BTC and institutional allocation

WHAT I’M WATCHING:

Geopolitical risk and economic data

It’s only Monday morning, and already this week is shaping up to be a battle between conflicting narratives.

On the one hand, we have improving consumer confidence and strong economic data.

Friday’s release of the latest University of Michigan consumer survey showed a strong rebound in optimism, with the consumer sentiment index climbing by over 9 points, way more than expectations and the biggest monthly jump since 2005. Annual inflation expectations for 12 months out dropped to 2.9%, the lowest level since the end of 2020. And over 50% of households expect their income growth to equal or exceed inflation, the highest conviction since mid-2021.

Meanwhile, job market data is reinforcing this view. Last week’s report of initial jobless claims came in much lower than expected, dropping to the lowest level in more than a year, while continued jobless claims also plunged.

And December US retail sales rose at the strongest pace in three months. The Fed’s approach of “higher for longer” does not seem to be doing much to dent consumer spirits just yet, and it’s been almost two years since the first hike of the cycle.

What’s more, earnings so far in this reporting season are not looking terrible. And on Friday, the S&P 500 reached an all-time high, which tends to be self-reinforcing as positive stock market news makes investors feel good, which triggers more optimism. Lovely.

On the other hand, there are strong economic headwinds.

The housing market is still struggling, with existing home sales for December continuing to fall, delivering the worst year since 1995.  

Concerns about the Chinese economy are mounting, despite the reassuring 5.2% GDP growth for 2023 – last week, Bloomberg reported that the government is contemplating issuing “special bonds” to stimulate the economy. These have only been used on three other occasions for funding emergencies. Earlier today, Chinese banks intervened to support the yuan, while the Shanghai Composite posted its steepest one-day drop since April 2022.

Inflation is far from vanquished: the latest US CPI data showed headline inflation accelerating, while “supercore” (the Fed’s preferred measure, which subtracts, food, energy and housing) clung to an annual 3.9%.  

And geopolitical clouds are gathering. The exit of Ron DeSantis from the Republican primaries throws even more weight behind the inevitability of a Trump candidacy and probably presidency, which understandably is making US trading partners and also US multinationals nervous. It’s not just the promised tariffs or deportations, both of which are strongly inflationary measures. It’s also the concern that other big destabilizing decisions will be taken without proper consultation or longer-term strategy.

Meanwhile, the Ukraine war splutters on, Russia and North Korea are growing closer, the mood in the Middle East is darkening, and skirmishes in the South China Seas are becoming more frequent.

(you don’t typically get sensationalism from The Economist - paywall, unfortunately)

With such colossal risks overshadowing incremental yet fragile economic gains, a reasonable question is: why are markets so cheerful?

The only explanation that makes sense to me is that the risks are so complex at the moment, with the causalities so volatile and the connections so intertwined, that investors don’t know how to price them. So, they focus instead on what they do understand, which is earnings projections, rates forecasts and liquidity conditions. This is very human – we tend to ignore the overwhelming so we can get through the day, and clients or trustee boards don’t want to hear about how bad things can get, they want plans for manageable risk and return.

This does mean that markets are generally mis-pricing potential risk. This can work in favour of those who are watching the pieces on the bigger board; hedging strategies are relatively cheap right now. History tells us, however, that re-pricings do happen with certain triggers – let’s hope we don’t see them. For now, this complacency feels uneasy.