Markets are largely range bound, albeit the previous strong correlations have broken so that some are at the top of recent ranges while others are at the bottom. This is contributing to an overall feeling of uncertainty, compounded by lack of direction from central banks, Geo Politics and muddied economic data.
Completing a trio of recent external press articles/videos. A discussion (again) on de-Dollarisation and the split between the Financial Capitalism of 'the west' and the industrial capitalism of 'the rest'
Almost nobody has heard of Wang Huning, but as the eminence gris of China, he has survived three Great Leaders, Ziang, Hu and now Xi and is the key driver of Chinese political philosophy. To understand him is to perhaps begin to understand today's China.
As Twain observed, “It is easier to fool people than convince them they have been fooled”, and thus the best route for investors is to acknowledge that the modelers will continue to assume a precision they do not have with a conviction that we should not share, but that precisely because policymakers fail to learn from history or the fact that it rhymes, they will continue to do ‘the wrong thing’. This is the background against which we have to make our own decisions.
A welcome return to the Bloomberg studios to talk about some of the big trends in the background, specifically the emergence of a Dollar zone and a 'de-dollarised zone' with long term implications for capital flows and investment opportunities
Despite Banking crises, markets ended the month and the quarter higher, giving relief to 60;40 funds and grief to Macro Hedge Funds, caught short once again. Geo-politics is building a new, non $ zone, which together with the Japanese shifting their monetary policy stance threatens significant changes to the 'plumbing' of global markets.
The multi-polar world emerging is producing a new 'Dollar Zone' of NATO plus Japan and S Korea. Investors need to start thinking what this will mean for capital flows.
SVB was a shock as everyone assumed everyone else had done the due diligence, but in reality it is a simple story of a bank that became a bond fund and failed to manage its duration and funding risks only to be hit with the equivalent of a redemption as its almost entirely corporate deposit base asked for their money back. By contrast Credit Suisse is hardly a surprise, but coming at the same time, and also in options expiry week, helped to create an exaggerated sense of a banking crisis. There isn't one. Both banks are the collateral damage of the shift to a new New Normal, where interest rates are set at 'normal' levels and normal companies can make normal profits (while great companies can make great profits). Investors should use the sell off from expensive end of fair value to cheap as an opportunity to renew or place their bets on the likely winners under this new paradigm.
SVB is a poster child for the old New Normal. It relied on deposits from the beneficiaries of the Silicon Valley deal machine that it then recyled into largely governmnet bonds on a carry trade that it convinced itself was risk free. However, even as the deal machine ground to a halt due to a lack of liquidity, it ignored its own duration and a liquidity mismatch (on-demand deposits, mostly with no Federal Insurance, invested in longer duration bonds) and when forced to acknowledge the mark to market losses as bond prices collapsed, it also found that an inverted yield curve has taken away its ability to run a carry trade. This is the new New Normal, where normal companies can make normal profits from normal interest rates. As investors start to look through accounting tricks like hold to maturity valuations and non GAAP earnings, Central Banks should also pause in their new found inflation fighting zeal and recognise the impact of inverting not only the yield curve, but the business models of the old New Normal too rapidly.
This is a video I recorded with Neil Shah at Vantage around three weeks ago when I was passing through London. Similar to the CISI subject but with more detail on the work we are doing with Toscafund.
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