“Events, my dear boy, events”
Midyear mark to market: It’s the end of the world and markets feel fine
When asked what most troubled him, former British Prime Minister Harold Macmillan reportedly responded, “Events, my dear boy, events.” While there are many advantages to being a solo researcher – I don’t have to bend my views to others and can be fearlessly honest – the downside is that one can little afford personal downtime. A bout of Covid and a long-planned family retreat seem to have coincided with a period dense in consequential events and we haven’t even gotten to the August-October window that most concerned me at the year’s start. Many of the concerns I raised at the start of the year have been confirmed or at least informed by recent happenings. But collectively, the events of the last month also markedly raise Uncertainty over the immediate outlook. The most noteworthy events in my mind are:
The US presidential debate laid bare President Biden’s undeniable mental incapacities.
After initially denying their problem, Democratic party leaders (allegedly) pushed Mr. Biden aside in favor of Vice President Harris weeks before the Democratic convention without input from primary voters.
An assassination attempt on former President Trump exposed serious lapses in US Secret Service protection.
Mr. Trump embraced crypto deregulation and Bitcoin as a reserve asset.
The US Supreme Court reversed the long-standing Chevron decision, significantly curtailing US regulators’ power.
A CrowdStrike software update led to massive failures on many Microsoft-based systems, exposing the serious business and security risks associated with platform systems.
US inflation dropped sharply in June and the Fed shifted its assessment of risks to balanced, raising the potential for September rate cut.
The Bank of Japan raised policy rates and dialed back QE as the yen began to reverse its long losing streak.
French President Macron refused to appoint a new prime minister after snap parliamentary elections he called to neuter the right-wing National Rally resulted in a radical Left plurality.
Seven centrist European heads of state excluded Italian Prime Minister Giorgia Meloni from the selection of the European Commissioner.
The UK elected a new Labour government with a large parliamentary majority on an historically low 34% of the popular vote.
After de-escalating from direct reciprocal attacks in April, Israel and Iran are again near war as their proxy attacks on each other expand across the Middle East.
As Russian advances in the Ukrainian war of attrition continue, Russia has retaliated against Western intervention horizontally by supplying advanced missiles to the Houthis and likely engaging directly in sabotage in Europe.
China and Russia are directly challenging the US in its own hemisphere, backing President Maduro’s claim to re-election and warning against “foreign interference.”
China’s Third Plenum doubled down on industrial policies aimed at technical and productive dominance of strategic industries.
In a first among major emerging markets, Mexico joined Western economies in criticizing China’s trade practices.
At the start of the year, I identified eight serious risks to the outlook, including several with uncertain probability but high impact:
Persistent US inflation beyond consensus expectations (base case);
The Fed risking its credibility by consistently underestimating growth, inflation and neutral rates;
Rising fiscal unsustainability around the globe;
Increasing likelihood of a breakout in G10 FX;
An underpriced risk of direct conflict between great powers.
Given the fast-moving developments and markets, in this note I will provide high-level updates on these risks, the three core Themes driving my outlook – Localization, Global Entropy, and Uncertainty – and my snap market judgements on the extraordinary events of the last month. Among the issues I cover are the likely outcome of the US election, fallacies of the “Trump trade,” the outlook for the US dollar and interest rates, and brightening prospects for Bitcoin. Over the next weeks, I will delve into the analysis supporting my views: examining specifically the US election, political violence and their implications; (fast-moving) geopolitical developments; changes to my economic and policy views; and the market implications of all these developments. In the meantime, I encourage all clients to send any questions or comments that spring to mind, and my Partner-level clients to reach out for one-on-one calls.