All of us who directly or indirectly (through a pension plan) are involvedin investing have a partner called Mr. Market. Mr. Market is the allegory that Benjamin Graham created to explain the investment world’s moods. Mr. Tamerlane is the phenomenon who became a legend (late 14th/early 15th century) by striving to bring Eurasia under the single rule of an empire. Potsdam is the place where for two weeks (July 17 to August 2, 1945), Harry Truman, Winston Churchill, and Joseph Stalinmet to redraw the world’s geopolitical lines following World War II, and the place where Truman made the decision to drop the atomic bomb. The argument of this commentary is that the market nowadays faces a manic-depressive situation at a time when modern rulers, like Tamerlane, dream again of redrawing a new world order.
So, where does the equity market stand today in relation to the debt market? As the graph below shows, equities (SPX) have had a good run so far this year, while long-term government bonds (TLT) have barely retained ground, with a small gain yesterday. Gold (GLD) has done better than equities while the performance of energy-related stocks (XLE) has been even better.
Source: Koyfin
There is little doubt that those relative performances are impacted by the new Trump administration and its intended policies (energy stocks/yellow line are expected to do well but lost some ground after the “drill baby drill” announcement; the expected economic policies of deregulation, incentives, and lower taxes are expected to boost equities; government bonds are in purgatory due to deficit spending, tariffs, and inflationary fears; inflationary fears and a cheaper dollar in the last week have uplifted gold prospects). As explained below, at the top of the equity markets the air might be getting thinner, especially if yields keep rising.
The current geopolitical environment meets the geoeconomic trajectory at the celebrated junction called AI. The Chinese AI entity called DeepSeek stole part of the Davos spotlight last week. DeepSeek is an open-source model that rivals Open AI’s model in coding and LLM (Large Language Models/machine learning models) at a much lower cost. It has the potential to undermine the AI dominance of the US at a time when US chip bans are aiming to cripple Chinese AI ambitions for dominance. There is the fear that constraints may become catalysts for Chinese goals as China has stockpiled chips, and has been innovating with algorithms aiming at memory optimization and reducing GRU reliance. Europe is nowhere to be found at that junction of Stargate and DeepSeek, as its innovative paradigm seems to be paralyzed along with its leadership. And of course, at that junction, we cannot ignore the militarization angle of AI.
Tamerlane was not an empire builder and certainly was not Genghis Khan. However, he was a military genius whose conquests transformed Asia and left an enduring legacy.Behind him ruins and destruction were observed from the Mediterranean to India, while he also served as a catalyst for Asia’s golden age. Tamerlane took advantage of his enemies’ weaknesses and his people’s loyalty and faith, while carefully using strategic planning and logistics networks. He conquered all of central Asia, Russia, Persia, and India, and also defeated the Mamelukes who were based in Syria and Egypt. Tamerlane’s age was marked by a new order of the then-known world and reminds us that we may also be on the verge of a new post-Potsdam order at a time when norms and institutions are questioned, borders may be changing, autocratic rulers are taking the upper hand, globalization is retreating, new power centers are emerging, and AI is reshaping business reality (and not only that).
The animal spirits that have been driving equity markets higher and higher resemble a market on steroids that may be positioning for a breather if judged by the emerging sentiment of investors as shown below.
If the government bonds’ yield volatility observed in the past few weeks continues – and especially if it takes a clear upswing turn toward 5% – it could turn the animal spirits around in the face of a sustainable earnings yield that is below the risk-free rate. If that animal spirit reverses itself as the air becomes thinner at the top (e.g. due to lower-than-expected earnings, or due to rising inflationary pressures), then equities could start a downward trajectory while investors start snapping bonds. So, while we retain restrained optimism and believe that particular sectors have promising prospects, our caution antenna becomes more sensitive.
Tamerlane’s conquests weakened the Golden Horde which eventually splintered into a number of Khanates, led to the expansion of the Dutchy of Moscow, and which, in turn, became the nucleus of modern Russia. Tamerlane changed the geopolitics of the day and that change affected Eurasia for the next 6 centuries. We are approaching the new Potsdam at a time when old Agreements are questioned, the rule of law and a rules-based system are not exactly respected and honored, rivalries are intensifying, hubris prevails, mispricing may be marking markets and tech developments, priorities are shifting,inequalities are rising along with regional territorial claims, and all of these are taking place in the midst of rising authoritarianism.
Mr. Market Meets Mr. Tamerlane at Potsdam’s AI
Author : John E. Charalambakis
Date : January 28, 2025
All of us who directly or indirectly (through a pension plan) are involvedin investing have a partner called Mr. Market. Mr. Market is the allegory that Benjamin Graham created to explain the investment world’s moods. Mr. Tamerlane is the phenomenon who became a legend (late 14th/early 15th century) by striving to bring Eurasia under the single rule of an empire. Potsdam is the place where for two weeks (July 17 to August 2, 1945), Harry Truman, Winston Churchill, and Joseph Stalinmet to redraw the world’s geopolitical lines following World War II, and the place where Truman made the decision to drop the atomic bomb. The argument of this commentary is that the market nowadays faces a manic-depressive situation at a time when modern rulers, like Tamerlane, dream again of redrawing a new world order.
So, where does the equity market stand today in relation to the debt market? As the graph below shows, equities (SPX) have had a good run so far this year, while long-term government bonds (TLT) have barely retained ground, with a small gain yesterday. Gold (GLD) has done better than equities while the performance of energy-related stocks (XLE) has been even better.
Source: Koyfin
There is little doubt that those relative performances are impacted by the new Trump administration and its intended policies (energy stocks/yellow line are expected to do well but lost some ground after the “drill baby drill” announcement; the expected economic policies of deregulation, incentives, and lower taxes are expected to boost equities; government bonds are in purgatory due to deficit spending, tariffs, and inflationary fears; inflationary fears and a cheaper dollar in the last week have uplifted gold prospects). As explained below, at the top of the equity markets the air might be getting thinner, especially if yields keep rising.
The current geopolitical environment meets the geoeconomic trajectory at the celebrated junction called AI. The Chinese AI entity called DeepSeek stole part of the Davos spotlight last week. DeepSeek is an open-source model that rivals Open AI’s model in coding and LLM (Large Language Models/machine learning models) at a much lower cost. It has the potential to undermine the AI dominance of the US at a time when US chip bans are aiming to cripple Chinese AI ambitions for dominance. There is the fear that constraints may become catalysts for Chinese goals as China has stockpiled chips, and has been innovating with algorithms aiming at memory optimization and reducing GRU reliance. Europe is nowhere to be found at that junction of Stargate and DeepSeek, as its innovative paradigm seems to be paralyzed along with its leadership. And of course, at that junction, we cannot ignore the militarization angle of AI.
Tamerlane was not an empire builder and certainly was not Genghis Khan. However, he was a military genius whose conquests transformed Asia and left an enduring legacy.Behind him ruins and destruction were observed from the Mediterranean to India, while he also served as a catalyst for Asia’s golden age. Tamerlane took advantage of his enemies’ weaknesses and his people’s loyalty and faith, while carefully using strategic planning and logistics networks. He conquered all of central Asia, Russia, Persia, and India, and also defeated the Mamelukes who were based in Syria and Egypt. Tamerlane’s age was marked by a new order of the then-known world and reminds us that we may also be on the verge of a new post-Potsdam order at a time when norms and institutions are questioned, borders may be changing, autocratic rulers are taking the upper hand, globalization is retreating, new power centers are emerging, and AI is reshaping business reality (and not only that).
The animal spirits that have been driving equity markets higher and higher resemble a market on steroids that may be positioning for a breather if judged by the emerging sentiment of investors as shown below.
If the government bonds’ yield volatility observed in the past few weeks continues – and especially if it takes a clear upswing turn toward 5% – it could turn the animal spirits around in the face of a sustainable earnings yield that is below the risk-free rate. If that animal spirit reverses itself as the air becomes thinner at the top (e.g. due to lower-than-expected earnings, or due to rising inflationary pressures), then equities could start a downward trajectory while investors start snapping bonds. So, while we retain restrained optimism and believe that particular sectors have promising prospects, our caution antenna becomes more sensitive.
Tamerlane’s conquests weakened the Golden Horde which eventually splintered into a number of Khanates, led to the expansion of the Dutchy of Moscow, and which, in turn, became the nucleus of modern Russia. Tamerlane changed the geopolitics of the day and that change affected Eurasia for the next 6 centuries. We are approaching the new Potsdam at a time when old Agreements are questioned, the rule of law and a rules-based system are not exactly respected and honored, rivalries are intensifying, hubris prevails, mispricing may be marking markets and tech developments, priorities are shifting,inequalities are rising along with regional territorial claims, and all of these are taking place in the midst of rising authoritarianism.