This is the ninth issue of the LSMIF newsletter. Please share with your friends and family and message in the Discord to participate and share a story!
Current News and Affairs:
US Companies face biggest decline in profits since Covid shutdowns: First-quarter earnings expected to fall 6.8% as inflation squeezes margins – June of this year, the US is in a medium-sized recession. Mark my words.
First batch of IPOs under new China listings rules surge on debut – Near triple-digit gains point to need for more reforms in country’s equity fundraising system, says experts
Yen slides as new Bank of Japan governor sticks to ultra-loose policy – Kazuo Ueda says negative interest rates and yield curve control remain appropriate for now
China escalates military drills near Taiwan and Japan – PLA aircraft carrier carries out 120 flight sorties in retaliation for Tsai Ing-wen’s US visit – The second the US collapses, Taiwan is being invaded by China
India boost investment along disputed border with China – New Delhi seeks to strengthen presence on ground as it vies with Beijing for influence in fraught region
Pay for FTSE100 chiefs rises by 12% despite cost of living crisis – Most upcoming executive salary increases are still below the average for workers after investor pressure
Fed fund futures show 80% probability of a 25 BP Fed Hike in May ! I think if Powell keeps his finger off the money printer for a while (which seems unlikely due to the yield curve) then they might avoid a huge recession
BRICS AGAIN! – Brazil, Russia, India, China and South Africa overtake G7 nations in global GDP to become more economically powerful – Take it in and enjoy the new world order!
China further increased the size of its gold reserves in March. The country purchased 18 tons, bringing their total to 2,068 tons of gold in total!
French President Macron says that Europe must reduce dependence on US dollar… he also makes a huge blunder basically saying leave China to take Taiwan… He’s cosying up big time!
CBDCs – Central Bank Digital Currencies: Orwell’s Nightmare come True:
The future is here! 95% of central banks are looking into the digitisation of their native currencies and with good reason! When you use a banking app now and send money or pay for things with money, it might seem instant to you but all you’ve sent is a digital IOU, the receiver gets a digital claim and the money takes about 3 days to crossover. That’s not very efficient, and while cryptocurrencies, like Bitcoin and Ethereum, literally solve this in a decentralised and pretty efficient way, it’s not good for business in the eyes of the government.
The digital yuan is already in place and being used nationally in China but it comes with an expiry date! Spend or lose out! Imagine having your bank account wiped just because you said something the government didn’t like (maybe just like this blog?). With CBDCs, this is a very real possibility. They could block your account, choose where you spend it, when you spend it. I don’t know about anyone else but I think I’m okay without…. They would have direct control over money but that’s quite good in a way. They already do and try to control it further through quantitative easing where they flood the economy with money and buy Treasury bonds and mortgage backed securities. They can also restrict the money through quantitative tightening which is this process in reverse, by selling off the assets. This is the stage we are in now.
The fact is, not many people trust the government (about 1 in 10 do) and whether we like it or not, this is the next stage. It is faster and better than traditional banking; middlemen like high-street banks will cease to exist in the way we know. They exist now to verify our transactions but the use of instant and verified transactions doesn’t leave much room for them. You could send and receive instant payments 24 hours a day and these transactions will settle instantly. Now that part is good but the potential control… I’m not sure. I know that Orwell (and Huxley!) are turning in their graves right now!
Recession Likelihood for the US:
The unemployment rate is always at a cyclical low just a few months before a recession kicks in. The TMC Global Credit Impulse measures the amount of real-economy money printing for the 5 largest economics in the World. It now looks worse than just before the Great Financial Crisis (2008) and the Eurozone Debt Crisis; this doesn’t even account for the upcoming credit crunch.
Inverted yield curves mean Central Banks are disincentivising the flow of credit and choking the economy off, causing sharp slowdowns. The longer the curve inversion lasts, the more economic damage follows. The Fed will be forced to cut to ~1% but they will be too late…
The inverted yield curve looks at the interest rate on 10-YR Treasury bonds compared to the 2-YR bonds. When you buy a bond, the longer it takes for those bonds to return that money, the more money you can expect to make from them; this makes sense due to opportunity cost. If you wanted to borrow my money for 10 years, I would charge you a higher interest rate than if you wanted to wanted to borrow for 2 years as I’m taking on more risk. That’s how it works in a healthy economy. However, when the economy flips and we have high interest rates, if those rates are hurting the economy (like now), people have started to expect those rates to come down to re-stimulate the economy. Historically speaking, that’s very bad. The yield curve is so inverted, we haven’t seen it like this since the 1980s… Even if it corrects now, a recession cannot be stopped.
If and when the recession occurs, inflation will stay high and most likely go even higher. OPEC cutting oil production is bad for inflation. This is as the cost of energy accounts for 7.5% of CPI (inflation). Oil has already moved up in price in response to OPEC’s decision.
People took real mortgages to buy houses in the Metaverse, paid $1 million for JPEGs (NFTS are a bit more than that but simplistically I’ll say JPEGs) and thousands of unnecessary “tech workers” were paid $200k/year. A lot of people are about to get unemployed to fix that. Even McCarthy said to Wall Street: “You should worry about US Debt Ceiling”…. While a recession is technically two successive quarters of negative GDP growth, I think it’s safe to say a pretty sizeable recession is very very close. Even McDonald’s is laying people off… we know tech is the first to go with layoffs but to see a big consumer company with a reasonably low beta start to layoff, I think the odds are against the US.
If we get another rate hike, (80% likely) we can expect spillover to other parts of the economy. Real-estate is already feeling the heat, with billions of dollars in real-estate loans expected this year. In the next few years, ~$1.5 trillion of debt is due for US commercial properties before the end of 2025. Interest rates have increased drastically with inflation still rampant, meaning the interest payments on this debt is going to be a lot more expensive than was expected when this debt was created. Most of these loans are owned by smaller banks… and who just failed? Some pretty large banks (Silicon Valley Bank and Credit Suisse among those). If the large banks are failing, albeit for different reasons, with no bailouts like we had in 2008, how do we think it’s going to go when these smaller banks that will be owing a lot of debt in the next 3 years go under? Who will lend to these banks when they go insolvent and what will happen to property values? Morgan Stanley seem to think commercial real-estate prices could tumble up to 40%, which is rivalling the declines of 2008’s financial crisis!!!
The average person in America is only saving ~3.7% of their income which is the lowest since 1959… Wages haven’t kept up with inflation, meaning the average person has to take on more debt just to survive. The debt ceiling is getting crazy. The US have almost $1 TRILLION in credit card debt alone! Record credit card debt and record low savings with high interest rates…. I hope everyone is open to learning Mandarin because the new world order is going to get crazy in 2023. Late 2024 is really the latest we could see a recession in my opinion.
So much credit has been created that is unproductive and speculative… it energised the economy, now it will make it fall off the inevitable cliff. This is the sequel to 2008, and like all sequels, it will most likely be worse.
(not financial advice) I’m looking to buy bonds after the last interest rate hike (note: this is incredibly difficult to time well), I’m buying more exposure to emerging markets, like India and especially China. I’m buying more gold and large cap. low beta companies like Unilever and PepsiCo. (PLEASE) Do not copy this as I’m not a professional.
- Andrei Jikh on Youtube
- Morgan Stanley
- MacroAlf on Twitter
As always, thank you for your participation and attention.
Chief Investment Officer