Last Friday, the S&P 500 reached an all-time high. However, the equal-weighted index of the S&P 500 is still below the old record (as shown in the graph to the right below). Moreover, the Russell 2000 is still in a bear market (more than 20% below its all-time high, as shown in the Bloomberg graph below). Tech stocks have made the difference again. It’s no secret: we are dealing with a technophilic marketplace. However, as discussed at the end of this commentary, tech developments are historically correlated with major scars that are still painful, while carrying a talismanic allure.
The markets didn’t start the year on solid footing, probably fearing an environment characterized by unpredictability and possible shocks. Concerns about inflation deficits and debts, the possibility of delayed rate cuts due to strong economic numbers, profit-taking, continuous economic and financial tremors in China, a German economic locomotive (at least for the EU) running out of fuel, uncertain consequences of global election outcomes (more than half the planet votes this year including the US, India, Mexico, Indonesia, Russia, the EU per the graph below), and most certainly geopolitical uncertainties from the Middle East and the possibility of an expanding war there, to the war-front in Ukraine, and the tensions between China and Taiwan, have kept the investment climate in suspense.
The shipping sector (which affects almost all international trading), as well as the oil markets, make plans given the dangerous triangle shown below. An expanded Gaza war could affect supplies, prices, and economic prospects, and threaten a major war that could shutter the economic foundations of all economies at a time when sanctions against Russia are shaky and China (the great beneficiary of the Ukrainian war) keeps exporting staff to Russia through Kazakhstan. In the last panel at the Davos Forum, the attendees left with an impression that an uneasy equilibrium is forming along with a panoply of geopolitical risks.
Now, while we can understand the strength of the economy, including the rising consumer confidence as reported last Friday, some labor market signals such as dropping open positions, a dramatic decline in the quit number, a significant slowdown in hiring, and of course the announced layoffs (from companies like Google, Amazon, BlackRock, Citigroup, Macy’s, Wayfair, and Xerox, to name a few), make me think that the C-suite may be preparing for a recession in the second half of the year. So, in an environment dominated by unpredictability and significant geopolitical risks, we think it might be wise to reduce a bit the investment optimism (to which we subscribed in late October of last year) and be more cautious given the circumstances.
The tone for such a move could also be echoed by the bond market. Since late December, long-term rates have risen by more than 30 bps (after dropping from 5% to 3.80% between October and December). Moreover, while markets expect monetary policy normalization, the yield curve between Treasury Bills and the 10-year Note remains inverted in a significant way, as shown below. We remain in the camp that rate cuts won’t exceed 75-100 bps this year and won’t start materializing before June. Having said that, if the economy shows clear signs of a recession by September, then we could see a major move towards yields’ normalization, where finally the 10-year Treasury yield will start yielding more than the 2-year yield, and soon thereafter be equal or more than the 3-month Treasury, especially if the Fed drops rates by 50bps in one of their meetings between October and December.
The steepening of the yield curve could be the key to deploying more capital into long-term Treasuries (at this point we estimate that it would be prudent to do so when the yield reaches around 4.30%).
Let’s close by where we started: Technophilic investors nowadays may be suffering from an illusion by thinking that the recent tech developments are unprecedented. We only need to recall that between the 1890s and the late 1920s, the world witnessed the invention of home electricity, airplanes, radio broadcasting, engines, tanks, and bombs, all of which may be more important than Instagram and Facebook. When so much technology is invented in such a short period of time, destabilizing effects emerge. That period and the one immediately after that gave us two World Wars, a depression, labor violence, fascism, autocracies, totalitarianism, a few genocides, and mass killings of unprecedented volume. By no means do we imply that the tech developments caused those horrors, but there might be little doubt that the tech developments aided and abetted them. And if we go even further back, we can recall that colonial history was marked by developments in military and transportation technologies that enabled the colonizers to subjugate and enslave populations, a traumatic process whose scars still haunt us.
Hong Wu (as well as his successors), the first Chinese emperor of the Ming dynasty tried and succeeded in limiting the social and political effects of major inventions (probably because of the ills that the Chinese people suffered from the Mongolian inventions and invasions).
Historically speaking, tech developments lead to wealth concentration/consolidation as well as to higher monopolistic/oligopolistic power (with the latter two market structures being antithetical to true capitalism). What can we learn from the Ming dynasty about mitigating dislocation and the negative tech effects without descending to totalitarian ways by repressing the progression of tech developments that enrich our lives?
Market Paradoxes, Risks, and the Ming Dynasty: Technophilic Trends Meet Unpredictability and the Fear of Shocks
Author : John E. Charalambakis
Date : January 23, 2024
Last Friday, the S&P 500 reached an all-time high. However, the equal-weighted index of the S&P 500 is still below the old record (as shown in the graph to the right below). Moreover, the Russell 2000 is still in a bear market (more than 20% below its all-time high, as shown in the Bloomberg graph below). Tech stocks have made the difference again. It’s no secret: we are dealing with a technophilic marketplace. However, as discussed at the end of this commentary, tech developments are historically correlated with major scars that are still painful, while carrying a talismanic allure.
The markets didn’t start the year on solid footing, probably fearing an environment characterized by unpredictability and possible shocks. Concerns about inflation deficits and debts, the possibility of delayed rate cuts due to strong economic numbers, profit-taking, continuous economic and financial tremors in China, a German economic locomotive (at least for the EU) running out of fuel, uncertain consequences of global election outcomes (more than half the planet votes this year including the US, India, Mexico, Indonesia, Russia, the EU per the graph below), and most certainly geopolitical uncertainties from the Middle East and the possibility of an expanding war there, to the war-front in Ukraine, and the tensions between China and Taiwan, have kept the investment climate in suspense.
The shipping sector (which affects almost all international trading), as well as the oil markets, make plans given the dangerous triangle shown below. An expanded Gaza war could affect supplies, prices, and economic prospects, and threaten a major war that could shutter the economic foundations of all economies at a time when sanctions against Russia are shaky and China (the great beneficiary of the Ukrainian war) keeps exporting staff to Russia through Kazakhstan. In the last panel at the Davos Forum, the attendees left with an impression that an uneasy equilibrium is forming along with a panoply of geopolitical risks.
Now, while we can understand the strength of the economy, including the rising consumer confidence as reported last Friday, some labor market signals such as dropping open positions, a dramatic decline in the quit number, a significant slowdown in hiring, and of course the announced layoffs (from companies like Google, Amazon, BlackRock, Citigroup, Macy’s, Wayfair, and Xerox, to name a few), make me think that the C-suite may be preparing for a recession in the second half of the year. So, in an environment dominated by unpredictability and significant geopolitical risks, we think it might be wise to reduce a bit the investment optimism (to which we subscribed in late October of last year) and be more cautious given the circumstances.
The tone for such a move could also be echoed by the bond market. Since late December, long-term rates have risen by more than 30 bps (after dropping from 5% to 3.80% between October and December). Moreover, while markets expect monetary policy normalization, the yield curve between Treasury Bills and the 10-year Note remains inverted in a significant way, as shown below. We remain in the camp that rate cuts won’t exceed 75-100 bps this year and won’t start materializing before June. Having said that, if the economy shows clear signs of a recession by September, then we could see a major move towards yields’ normalization, where finally the 10-year Treasury yield will start yielding more than the 2-year yield, and soon thereafter be equal or more than the 3-month Treasury, especially if the Fed drops rates by 50bps in one of their meetings between October and December.
The steepening of the yield curve could be the key to deploying more capital into long-term Treasuries (at this point we estimate that it would be prudent to do so when the yield reaches around 4.30%).
Let’s close by where we started: Technophilic investors nowadays may be suffering from an illusion by thinking that the recent tech developments are unprecedented. We only need to recall that between the 1890s and the late 1920s, the world witnessed the invention of home electricity, airplanes, radio broadcasting, engines, tanks, and bombs, all of which may be more important than Instagram and Facebook. When so much technology is invented in such a short period of time, destabilizing effects emerge. That period and the one immediately after that gave us two World Wars, a depression, labor violence, fascism, autocracies, totalitarianism, a few genocides, and mass killings of unprecedented volume. By no means do we imply that the tech developments caused those horrors, but there might be little doubt that the tech developments aided and abetted them. And if we go even further back, we can recall that colonial history was marked by developments in military and transportation technologies that enabled the colonizers to subjugate and enslave populations, a traumatic process whose scars still haunt us.
Hong Wu (as well as his successors), the first Chinese emperor of the Ming dynasty tried and succeeded in limiting the social and political effects of major inventions (probably because of the ills that the Chinese people suffered from the Mongolian inventions and invasions).
Historically speaking, tech developments lead to wealth concentration/consolidation as well as to higher monopolistic/oligopolistic power (with the latter two market structures being antithetical to true capitalism). What can we learn from the Ming dynasty about mitigating dislocation and the negative tech effects without descending to totalitarian ways by repressing the progression of tech developments that enrich our lives?