Recency Bias makes us focus on what just happened and ignore even recent history, while the end of history illusion makes us think that there will be less change in the next five years than in the last five. A quick recap on the last 5 Q4 periods reminds us of the dramatic changes we have seen, and while the next 5 years may not be as dramatic, we would see these changes as pressaging further changes on paths now revealed, be it BRICS+ disrupting the financial system, AI and working from home disrupting the service sector globally or just the retsoration of the proper price of money and liquidity through the end of QE.

Two steps forward, one (or two) step(s) back. After a strong July, when markets seemed to broaden out from the narrow concentration on mega cap tech stocks, investors were once again frustrated to see most stocks and markets give everything back in August, leaving many sectors, stocks and themes once again flat for the year. We believe that the proximate cause of the weakness in August was the late July bond sell off from Japan that spilled across to trigger trading stop losses in equity markets at a time when many were closing books for the holidays. Meanwhile, the high returns available on risk free $ cash are helping the dollar while continuing to impose something of a liquidity drought across other markets, including further out on the bond curve and many medium term risk managers are happy to delay the decision on searching for real returns in equities. China has dominated the narrative in August, but the long term investors need to start to think of the implications of the new BRICS 11 grouping, not least on account of the dominance of resource rich nations and the Sovereign Wealth funds they support...and how they are going to spend that money going forward.

With an upcoming Camp David meeting with US 'allies' in Asia and the BRICS meeting in South Africa, the narrative on China was always going to take a more negative tone. Investors need to recognise that while in the short term narrative managers may dominate, in the longer term cash flows count. China's troubles are not new, but nether are they anywhere near as bad as presented; exports are slowing, but still 40% up on pre Covid levels, while GDP growth is still 3x the US and 10x Europe. China offers both opportunities and threats, but what it doesn't offer is the opportunity to ignore it.

Over at substack we record a version of the Market Thinking for those that would rather hear it than read it.

July saw markets broadening as recognition that the second leg of a bear market is unlikely to appear became more widespread and fears of a recession receded. Shorter duration areas such as energy, mining and financials began to catch up with the megacap tech stocks. While retail may be too bullish, institutional investors are heavily short equities and long cash, a position that is not sustainable in the long run. The wobble in bond markets in early August may have more to do with 'the beginning of the end' of yield curve control in Japan than any US fundamentals, but will doubtless keep cash as a crowded trade in bond markets for the time being. Meanwhile, politically inspired narratives against China should not fool investors that they can ignore the impact of China on economies as well as markets; martial threats may be exaggerated, but competitive ones are very real.