Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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May 21, 2023

Macro Risks, Uninvestable Banks & Other Opportunities


Hiroshima Photo Bomb

The awkwardness of Narendra Modi and Luiz Lula da Silva as Volodymyr Zelenskyy photo bombed the G7 this weekend illustrates today’s rapidly changing and complex geopolitics. While the event made the front pages and provided hope that the world might yet fully rally behind Ukraine, it also highlights the radical uncertainty that all countries face. The dollar recovered from its recent lows, helped by positive Congressional noises about progress in the debt ceiling debates. Fiat currency, fractional reserve banking, and dollar supremacy are safe for another couple of weeks. Meanwhile, there is more to consider.

Out of Africa

While the short-term machinations of geopolitics might be impossible to map, the world’s longer-term demographic trends are more structural and unstoppable. India overtook China as the world’s most populous nation last month, but the UN’s extrapolation of global population trends, as illustrated by Statista here, is more informative.

By 2100, UN data projects that India will have twice the population of China, the USA will only be the world’s sixth most populous nation and five of the ten largest countries by population will be African (Nigeria, DRC, Ethiopia, Tanzania and Egypt). Although the timing and implications are tricky, it is hard to imagine that US hegemony and the dollar trading system will survive this century.

Google Turns on the AI

But radical uncertainty is not just the preserve of geopolitics. AI continues to shake the foundational views of our existence. Amid increasing pleas for the government to do something about it, Alphabet CEO, Sundar Pichai revealed that the tiger was already out of the cage. At Google’s recent developer event, Pichai pointed out that far from being slow to embrace AI, Google is already seven years into its journey as an AI-first company. He revealed that Google is taking bold and responsible approach to re-imagine its core products, including search. Such is Google’s consumer reach and investors’ AI frenzy that in the ten days since this event, Alphabet added $250bn in market value. (For context, this change in value approximates the total market value of the UK’s FTSE 250, ex-investment trusts).

The AI Ship Has Sailed

Nearly twenty years after Facebook’s birth, Governments have yet to regulate social media effectively. At the same time, AI is off and running, writing code, answering customer enquiries, and (so we are told) plotting our ultimate demise. As the controversial biologist, EO Wilson said over a decade ago:  humanity’s real problem is that we have palaeolithic emotions, medieval institutions and godlike technology. Our best hope might be that Bard and Chat GPT grow up kind enough to care for us as their domesticated pets.

Banking Crisis, What Crisis?

As part of their coup d’etat, the AI bots will no doubt take a few seconds to redesign the global banking system. This banking crisis has been a duration and rates problem which the Fed could resolve directly. But it has chosen to stay focused on inflation despite the bond market’s dominant concerns about banking failures, recession and deflation. Credit conditions and real estate values remain under pressure, albeit no banks have had to be rescued in over two weeks.

Are Banks Investible?

This crisis has seen US banks give up five years of share price outperformance versus European banks in one month. We are curious whether this is an anomaly or a structural change. But, judging by the tone of the London Value Investor Show last week, the banks’ very “uninvestability” is their attraction. Legendary investor Howard Marks explained how he had built a career out of investing (carefully) in the uninvestable. He cited his funds’ strong returns from Evergrande’s collateralised debt as an example. And in a typically robust contrarian style, Kernow’s Alyx Wood gave an excellent investment pitch for the “uninvestable” UK-listed Metro Bank.

Inflation - Dead or Resting?

For now, monetary inflation is rapidly becoming yesterday’s news. Its sticky components, housing and employment, should decline into H2, proving them laggards, not holdouts. And while this does not mean inflation is dead and buried, its impact will lessen over the coming months. Over the longer term, market cheerleader-in-chief Goldman Sachs has outlined how AI will add materially to global GDP over the next decade and with greater force than the advent of the internet and the addition of China to the WTO in the last 25 years. Investors must judge how deflationary AI will be and critically how it copes against the inflationary headwinds of increasingly desperate fiscal and monetary policy and the dynamic of geopolitics.

A Looming Liquidity Dispute

Over recent weeks conflicting liquidity drivers have moved financial markets sideways. The Fed has been trying to pull liquidity out of the market while the Treasury has been adding to it. But the Treasury General Account is running low, and Secretary Yellen declared the debt ceiling imminent. While the focus is on the potential political implications, the financial implications are more certain and negative. Post resolution, the Treasury must refill its coffers, significantly reducing market liquidity, unless the Fed performs an accommodative pivot. There will be some challenging discussions between the Treasury and the Federal Reserve over the coming weeks, straining the credibility of central bank independence, the outcome of which will be consequential for global markets.

Is the Energy Crisis Over?

Whether oil or interest rates is the more contrived “market” is a moot point, but they both suffer from significant political interference and have huge political ramifications. Oil prices remain weak as hopes of economic growth fade. And while the Treasury has run down its General Account at the Fed, the White House has been running down the Strategic Petroleum Reserve (SPR). Politicians and markets are beginning to behave like the energy crisis is over, and we can resume a gentle path to a net zero energy transition. While Europe has successfully managed its gas supplies in the short term, longer-term constraints remain as investment levels have declined. Energy supply chains proved the most immediately vulnerable when economies re-opened in 2021, and prices took off, resulting in many of the UK’s retail energy suppliers going bust long before the Ukraine invasion. This sector will provide excellent buying opportunities when deflation fully surpasses inflation as investors’ main fear and energy prices finally capitulate. What a lovely irony if “Sleepy Joe” Biden defies his sharp Wall Street critics and closes the SPR short from $110 at $60 later this year.

Is The UK Stock Market Fit For Purpose?

Max King in MoneyWeek, and Graham Ruddick in the Times were joined by fund manager Nick Train, in his excellent half-year report from Lindsell Train, in the debate about the suitability of the UK as a listing venue. The CEOs of unhappily listed THG and unregulated Revolut took shots at this softened target. THG has proven unsuited to public listing, while Revolut seems burdened by an overly complex equity structure and a SoftBank-hyped private valuation. This debate endures as Aquis Exchange, the owner of The Aquis Stock Exchange, celebrated its 10th birthday at the Museum of London. As written previously, the UK’s AIM market has been off-target since its heyday in the early 2000s, and some healthy competition from an alternative primary listing venue must be positive for the UK’s prospects of finding the next ARM Holdings. But as mentioned in early March, the UK’s low stock market esteem is mainly cyclical and valuation driven. As such, it provides investors with plenty of long-term buying opportunities.



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