Good afternoon,
A bumpy January rode markets up, but like a stiff-suspensioned F150 accelerating a washboardy hill.
Here’s a quick look at our weekly Global Insights;
Highlights:Too much debt – China has entered the bust phase of a debt boom. Reopening and stimulus will have positively impacts, but shouldn’t be overrated this time around.
- The Fed gives up the fight - With its latest policy move, the Federal Reserve appears to be acquiescing to the market’s view that rate hikes are nearing an earlier conclusion, and at lower levels, than policymakers expected. We look at the reactions in the equity and bond markets, and the implications for the year ahead.
- Regional developments: TSX posts a strong start to the year; U.S. stocks continue their strong start to the year; China consumption and PMI picked up in January
Full report: Global Insight Weekly
The oft-repeated, still-relevant long-term strategy reminder, The importance of staying on course
For Too-Long-Didn’t-Read Section (for keeners) read on:
The economic peculiarities of the past three years are in the clean-up phase, but still grind on as a snowblade screeching over icy pavement. In central BC we’re familiar clumsy gravel trucks, and annual windshield replacements. It’s not over until ambient temperatures reveal the broken mailboxes, potholes, and a brief ugly brown season gives way to a crocus or two.
Which is to say, today, let’s touch on a few themes from the late-November, and mid-January Portfolio Manager Conferences I attended. Is spring coming? Sort of.
Fed Bred Dread: Dating back to Eugene Meyer, (term: Sept/1930 to May 1933), every Fed chairman had personally experienced the Great Depression until Ben Bernanke, (born 1953) who was appointed February 2006. For too long now, markets have had to obsess over the machinations of central bankers instead of a measured examination of companies that make things we might want to buy. And that’s how we got a year like 2022, the worst year for bonds in a lifetime. Nobody goes to the hockey game to watch the referees. In its core, productivity is a creative endeavor, not a tango with interest rates.
The Dragon in the Room –The day Nixon agreed to his famous visit to China, Mao gloated publically that the US was: “… changing from a monkey to a man, (but) not quite a man yet. The tail is still there.” This snarky quip from a leader who ran an 800 billion person prison camp, starving tens of millions, all while stubbornly refusing to brush his own teeth. Imperiousness is crippling.
China’s triple-headed challenge:
- Autocracy and Markets not a cuddly pair. This is manifest in rigid policies, such as:
- Party monitors installed on corporate boards blow a Maoist chill over Chinese entrepreneurs. Xi will tolerate no shinier objects;
- Absence of debate concentrates risk. Example: Covid -- locking folks in their apartments for three years dampens the vibe, cripples supply chains, and didn’t stop the virus.
- Demographically, the 1979-2016 one-child policy, has spawned the country’s current low birth rate of 1.28 per woman – and a demographic sinkhole looms
2) Too much debt – China has entered the bust phase of a debt boom. Reopening and stimulus will have positively impacts, but shouldn’t be overrated this time around.
3) De-Chinafication: The west has other dance partners eager to welcome the shunned capital. Call it On-shoring, Right-shoring, or Friend-shoring, all of it is ex-China.
Cry if you want to, but it’s your Party. To be clear, this isn’t to suggest the economic thrust is over in the Middle Kingdom. The 2023 Chinese dividend will probably be net positive globally, but it mightn’t look like the 2009 Chinese moment that helped make that such a memorable comeback year.
Caveat: Inflation’s relationship to Chinese exports. To the extent that China can flood markets with cheap goods again, inflation might have an ultra-slim-fast year. The volumes there are hard to predict, (because official statistics are unreliable) but so capacious that it could indeed bring help stabilize prices nicely.
A couple of graphics show the mixed story in China:
Despite all the chatter about moving production out of China…
Pesky demographic indigestion afflicts the West:
Participation Rate is a measure of workforce engagement, and is not to be confused with the more commonly reported Unemployment Rate, which doesn’t include working age folks who have given up looking for a job.
Women increasingly joined the workforce since the 1950’s, but even they have tapered off a bit since 2008
Example: If only 60 out of 100 working-age adults make themselves available to the workforce, and 57 of them are working, that’s an unemployment rate of 5% (3/60=.05=5%). Not bad as a stand-along stat. But by this measure, 57 of 100 working-age people are carrying too much of the weight of society. There’s another 40 people who no longer thumb through the Help Wanted ads at all.
The participation rate is sliding.
The combined participation rate for working age men and women has been shrinking since the early 2000's
But of particular concern is working age men, whose participation rate has fallen for over 7 decades
Where have all the good men gone? According to economist Nicholas Eberstadt, it’s complicated, but the author of the aptly-named, “Men Without Work” adds:
“… the unintended consequences of the emergency rescue programs had the result of incentivising millions of people to leave the labor force.” Here the pandemic relief was the latest in a series of work disincentives, not an isolated variable.
The Dream: Housing (un)affordability is also a major factor: Way back in 1911, G.K. Chesterton described it as a focus of good society-making:
“An honest man falls in love with an honest woman; he wishes, therefore, to marry her, to be the father of her children, to secure her and himself... If any system, feudal, servile, or barbaric, does, in fact, give him so large a cabbage-field that he can do it, there is the essence of liberty and justice. If any system… give him so small a salary that he can’t do it, there is the essence of eternal tyranny and shame.”
Had no wife and couldn’t keep her: As the chart below demonstrates, the household formation dream has become more difficult. By implication, this may be a good argument toward us helping out a few earnest youngers with a down payment.
He should know: “There are no solutions, only trade-offs. “ That’s a quote from Thomas Sowell, who had every disadvantage early in life. Born in poverty in Harlom, Sowell was raised by aunts and uncles and extended family, none of whom had much in the way of finance or education. But he made his way against all odds to become a brilliant, much-published economist and role model.
Asset valuations have been good to many of us during the period shown above, and that journey is not over by any means.
Just a little food for thought as we launch into the 11 remaining months of 2023.
Enjoy your week!
Mark