Market Thinking

making sense of the narrative

Market Thinking September

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Zero Policies and the Policies of ‘Zero’

With the long summer holidays and so many elections coming up, there is a feeling of Policy Paralysis going on, but also a recognition that this is about to change. In particular, the failed and deadly collective of ‘Zero’ Policies – Zero Interest Rates, Zero Covid and Zero Carbon – are all unravelling, while the latest, Zero Dialogue (over Ukraine), is rightly coming under a lot of pressure. Changing tack is necessary, but risky, and markets remain nervous.

September is, of course, probably the worst month for seasonality in Equity Markets, with particular anxiety around the option expiry mid month. The restated hawkishness of the Fed in late August saw off attempts to break through long term resistance levels and encouraged further shorting by the CTA funds, leaving us in the ‘new normal’ position of potential capitulation versus potential bear market squeeze. Of course, the Fed isn’t the only policy maker in town any more, with a raft of elections, in UK, Sweden, Italy, Brazil, Israel and of course the US and China coming up in the next three months, policy uncertainty remains high, not least as so many of the embedded policies of the last decade are having to be revisisted. Volatility has shifted to the currency markets once again, while both bonds and equities have retraced back into their trading ranges. Currently, the Wall of Worry looks too steep for most appetites and some appear to be back to selling rallies.

Meanwhile as we look to q4, and beyond, we note that The Tyranny of the Zeros is coming to an end. Zero Interest Rates and Zero Covid are all but done, while Zero Carbon is having an uncomfortable confrontation with reality. A more recent Zero, Zero Dialogue (over Ukraine), is coming under necessary political pressure, leaving the final Zero – Zero Alternative to the US$ – coming into view. Currently, there is a lot of money hiding in $ assets, but at some point the flow will reverse and we should not lose sight of the fact that while the $ is now the currency of ‘The West’, it is no longer the currency of ‘The Rest’. Changes in all of these areas will drive capital in different directions and it is in these areas that we should aim to concentrate longer term Thematic investments.

Short Term Uncertainty -wall of worry

The Equity markets spent the second half of August just below the technical resistance presented by their long term moving averages, needing to climb a Wall of Worry to break higher. Disappointingly, but not surprisingly, Fed Chairman Jerome Powell put paid to an early breakout by restating the implicit Fed strategy of selling calls on the markets – emphasising that the obsession has switched from selling puts to create inflation to selling calls to stop it. While we might argue that this new policy is as misguided as the old one , we should never lose sight of the fact that it is the Fed, not ourselves, that are setting the policy. Bond markets meanwhile had given us a (slightly) early warning signal ahead of the Fed with the confidence indicators across various Bond ETFs used in our Global Bond Portfolio turning south towards the end of August. Bond volatility has been a major headwind for markets during the course of this year, prompting extended deleveraging and while this has certainly eased – the higher uncertainty represented by the higher discount rate is keeping multiples, and thus equity markets, constrained.

Meanwhile, as the chart from Bloomberg, courtesy of our friends at Redburn, shows, even though asset managers are now more or less ‘neutral’ on markets, the leveraged traders remain as short as ever, which leaves us firmly in the bear squeeze zone we have seen all year.

September has terrible seasonality and the fact that, as discussed, our Bond indicators turned down in mid August, marking the near term top in Equities as well as a renewed bout of $ strength/weakness in the Yen and Euro, highlights the general nervousness across all markets. Currency volatility has spiked again, which is dominating the narrative and leaving the US as the ‘least bad’ option for many and doubtless keeping assets for many global investors in $ based assets (commodities and gold as well as $ financial assets, depending on benchmarks) hoping for positive returns in Q4 – even if only driven by being out of domestic currencies.

Medium Term Risk – Policies only seem to deliver the unintended consequences

Along with Zero Covid and Zero Carbon (aka the Green Leap Forward), the fact that neither of the Fed’s policies – Zero Interest Rates to create inflation and now crushing interest rates to stop it – actually works , except to deliver the unintended consequences, should not lead investors to believe that common sense will prevail. Sadly. The lack of Cost Benefit analysis of any of these policies is being revealed, but currently policy makers are just doubling down.

To this deadly trinity of Zeros, we can now add Zero Dialogue. The proverbial Elephant in the Room remains Ukraine. Nobody wants to talk about it, but the fact is that, as with Covid, the policies being enacted (in this case the self-harming sanctions, especially in Europe) are dominating almost everything else going on economically. At some point there will have to be dialogue, not least because at the moment the Russians haven’t actually stopped exporting gas and other vital raw materials, it’s just that ‘The West’ refuses to pay for them in Rubles. Should the Russians actually impose sanctions themselves, then there could be serious economic, political and social unrest in Europe. Unfortunately, the US, which is currently exporting lots of Grain, Gas and Guns to Europe at hugely elevated prices, has little incentive to act quickly. However, the prospect of major economies like France and Germany ‘breaking ranks’ and negotiating directly with Russia – bypassing the US and the EU – should not be discounted. As we discuss in a post (his master’s voice) there are some modest encouraging signs of a shift in the narrative away from Zero Dialogue, which is obviously to be welcomed. The downside however is that this appears as much about a shift to a full scale anti China stance as anything else.

Economically, even if the energy crisis resolves, the fact that the rest of the west are in lockstep with the Fed even though the policy is heavily inappropriate for their economies, is likely to introduce a set of rolling recessions as tighter monetary policy acts like tighter fiscal policy (floating rate mortgages act as a tax on disposable income). Thus, while central Banks apply inappropriate monetary policy at the same time as ‘Western’ foreign policy dictates that everyone buy expensive gas, grain and guns from the US in protest against Russia, any resolution of the latter is only going to lead to different problems. In particular, the next priority a[[ears to be to cancel any trade deals with China, because, again, US Foreign policy dictates it. The announcement that, likely UK Prime Minister, Liz Truss is to prioritise Defence over Trade and label China a major threat is but the latest example of a shift in policy stance seemingly dictated from elsewhere. Meanwhile, at the stock level, the latest hit to Nvidia, where US government policy effectively banned it selling chips to China, highlights the policy risk in certain sectors. No wonder many retail investors are tracking this particular trader.

Long Term Themes – Exposure, exposed.

Long Term Themes are driven by capital flows and also, increasingly, shifts in government policy, which can either stimulate or over-ride those flows. The legacy of Covid – or more accurately the policy of Zero Covid – has been to expose those economies and companies most exposed to just in time deliveries and the global supply chain, while the legacy of the end of Zero Interest Rate Policy (ZIRP) has been to expose those economies and companies most exposed to cheap capital. Meanwhile, as discussed, the policy of Zero Dialogue and sanctions on imported Russian energy and raw materials has exposed those economies and companies most, well, exposed to those inputs. Cheap labour from Asia, cheap money from the US and cheap energy from Russia created a set of ‘winners’ over the last decade (or two). All that is now gone. New policies are now being enacted and capital will flow in new directions – as well as some still in the old directions. This will obviously have consequences for capital markets, which after all are simply the conduits for these flows – with a lot of speculation and trading activity piled on top(!)

Meanwhile, the recognition by the Wall Street Journal that the widespread adoption of Zero Carbon Policies, nowhere more enthusiastically than by the Boris Johnson government, has been a major component of the current energy crisis is a welcome establishment challenge to the orthodoxy of the Green Leap Forward. Breaking the consensus group think, which as with Covid, prevented any discussion of alternatives is key to unlocking capital flows. Nuclear is obviously one, while an acknowledgement that more needs to be spent on drilling and distribution of fossil fuels in order to, quite literally, keep the lights on, makes energy now a long term thematic rather than just a shorter term commodity cycle play.

Policy makers are generally walking away from Zero Covid (except sadly Hong Kong and China), and reshoring, higher inventory and just in case rather than just in time is now the new norm. The era of plenty – in terms of excess supply from Asia – is over and price levels have reset higher. This is not the same as inflation, however, but is a shift in pricing power.

An End to the policy of Zero

With Zero Interest Rates gone, Zero Covid now, largely, gone, Zero Carbon under serious challenge from reality and Zero Dialogue under increasingly political pressure, we have one more Zero to go. Zero alternative to the Dollar.

The graphic below reflects ‘the Chinese View’ of the US Dollar dominance that accompanies a series of articles in Global Times, the quasi official English language news site.

Source, Global Times.

As the latest article bluntly puts it: US irresponsible monetary policy catalyst for de-dollarization push. It doesn’t mention the obvious political aspects, but the direction of travel is clear.

Currently, as noted, the US$ is in the winner of the least ugly competition against other western currencies, but that should not obscure the longer term issues, which remain centred around the splintering of the current world order into two blocs – the West and the Rest – and in particular the shift in demand away from the dollar, both as a means of exchange and a store of wealth – two of the primary roles of money.

US$ losing its role outside the West as ‘Money’.

  1. A medium of exchange
  2. A standard of deferred payment
  3. A store of wealth
  4. A measure of value

Of the other two, the standard of deferred payment and measure of value, are in any case being steadily eroded by the development of alternative investment markets. Previously ‘The Rest’ recycled their savings surpluses through US financial markets. Clearly this is going to happen far less going forward. The projected growth of the Global Middle Class by 700m people spending an additional $18trn between 2020 and 2030 might be measured in US$, but is largely going to take place in other currencies.

Middle Class growth is largely going to be in ‘The Rest’.


The US $ is currently dominating ‘The West’, but the reality is that it has already lost ‘The Rest’ and that is where the growth is. The $ has essentially gone ‘ex growth’. New systems are being built that will re-route capital flows and thus the lifeblood of markets. These are longer term themes, but their impacts will start to be felt very soon.

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One Reply to “Market Thinking September”

  • Thanks. Very perceptive article as ever. The five Zeros is an interesting way of thinking about things!

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