Twenty years ago, the G7 group’s theme was global imbalances. France, which nowadays holds the rotating presidency of the G7 group, has decided to put it back on the agenda. China’s surpluses might be the only subject where the G7 group (US, Canada, Japan, Germany, France, UK, and Italy) would agree, given the unsustainable debts of everyone. Adjusted for GDP growth, the US and China’s imbalances (the two countries that account for 40% of the world’s GDP) are as high as in 2006, just before the crisis started in 2007.
Homer’s Odyssey is marked with the phrase “stages of life.” In Homer’s first epic (the Iliad), ethical standards are murky. The protagonist Achilles breaks and reinvents them, while Hector, the antagonist, observes them, so the drama of choosing between Achilles and Hector culminates when the latter is dead, and Troy is conquered because of Odysseus’ Trojan horse plan. In the Odyssey, Homer devotes the first four chapters to Telemachus (Odysseus’s son). Odyssey’s Books I to IV represent their own mini-epic, known as Telemachaia. The Telemachaia (like Huckleberry Finn, David Copperfield, or Catcher in the Rye) is essentially a coming-of-age story: the young and untested hero who must shape his identity and bend the long arc of history toward justice.
Nowadays, loose fiscal and monetary policies, circular financial flows, reckless risks, lax regulatory framework, corruption, demographic changes, geopolitical antagonism, boneheaded policies, the abandonment of norms and alliances, along with the demolition of institutional guardrails, exacerbate instability and force new “identities”. The modern doctor Victor Frankenstein desires to create life, and in the process, creates a monster whose pursuit brings him his own death because of the harsh Arctic elements.
As I am drafting these lines, I observe that gold is close to $5,100, silver is at $109, and platinum at $2,870. Dislocations are observed in equities, as emerging markets are outperforming US equities, per the graphs below.
But besides precious metals, the weakening of the dollar, and the Telemachaian emergence of emerging markets, bond markets have started feeling tremors too, especially in Japan, where just $280 million of trading in bonds wiped out $280 billion and created a shock last Tuesday in a $7.2 trillion market (see graph below). Japan might have the potential of becoming a center of global bond market instability, which will affect all global markets, especially if repricing takes place in US equities and precious metal prices continue their upward trajectory.
In the morals of history, winning Troy and arriving safely at Ithaca are as important as finding your child faithful to the ethics, standards, and priorities that should be honored and observed. Otherwise, everything is lost. Upholding the truths that had sustained the kingdom of Ithaca were as important to Odysseus as winning the war in Troy. And there were two people responsible for that: his wife and his son.
We do have a serious imbalance today when 80% of the increase in private domestic demand originates with data centers. What would happen if that stopped? Debt accumulation (which is sliced and sold as a safe bond investment) of questionable collateralized paper is trouble waiting to happen. The steepening of yield curves around the world is sending a warning signal, as shown below.
The investment cycle this time moves contrary to the traditional trading pattern. Usually, when a flight to safety occurs, stocks are selling off, but Treasuries and the dollar strengthen. This time, for the reasons explained above, all three are moving down. When that reversal is seen through the eyes of central banks’ holdings, then we wonder if a new reality is dawning on the horizon.
Telemachus went through an identity crisis. When Athena visited him, her questions focused on one thing: Is he truly the son of Odysseus? Telemachus’ answer? “My mother certainly says that I am Odysseus’s son, but for myself I cannot tell.”
Today’s investors like Telemachus must ask: “Who am I? Do I have what it takes to be the son of a hero-making?”
We still believe in assets that represent no one else’s liabilities.
