Capital Flows and Asset Markets

2024 was an intriguing year. I feel like I was right about things macro, but that macro and markets are not longer connected in the same ways.

2024 Review

So lets go over the bits that have been right. Broadly, speaking I saw inflation inflecting higher in a “pro-labour” world. When I look at measure of food inflation, they have indeed inflected back to the 1960s and 1970s era. Perhaps the most stunning inflection is in Japan. Decades of flat food prices have been replaced with ever rising food inflation.

On the back of this, I have stayed relentless bearish on bonds - both JGBs and Treasuries. This has been broadly correct. Japanese 10 year at 1% still looks a short to me.

So far so good, but I also assumed that we would see a broad-based break out in commodity prices. While gold has touched new all time highs recently, if we look at the Commodity Research Bureau Raw Industrial Index, it has had a lacklustre time, and remains at levels first seen in 2010.

I had assumed the move higher in food inflation, and higher yields would cap asset prices - at least in nominal terms. In some ways that has worked. If you look at anything that is “old technology” it has struggled this year. It has actually been a year where shorting could have made you money. A mixture of oil and gas names, and ICE auto names would have worked reasonably well, but I won’t lie, it would have been a struggle. My pro-labour view would have assumed some widening in credit spreads - instead we see all time lows. Assets markets have been much stronger than expected.

I had also assumed a focus on full employment and rising wages, combined with advances in artificial reproductive technology (ART) and a bi-partisan pro-natal move globally would lead to a change in fertility and birth rates. In UK and Australian data, we have definitely seen more women freeze eggs. But in the most relaxed regime for ART - Denmark - new births have fallen back to lows. This is an area to be re-examined.

2025 Target Areas

Below are the areas I am going to focus on. If you think they are interesting, become a paid subscriber, so I know to spend more time on them.

Tech and Quantum Computing

One thing that has become clear is that tech and trade flows are what drives macro, not the other way around. Focusing on US domination of not only cloud computing, but also electric vehicles would have been a better lead on the relative weakness of oil, as well as the Euro and the Yen. With that lesson in mind, I think the recently announced breakthrough by Google in quantum computing could have huge effects.

One thing I had gotten wrong about markets was that surging pricing in the tech space would lead to move entrants - and then falling prices. This is a typical capitalist system. When I track TSMC quarterly pricing, I had assumed investment by other semiconductor producers would also pricing to inflect lower at some point. At the moment, there is no indication of that.

The pricing of semiconductors has been a huge driver in the performance not only of TSMC, but also Broadcom and Nvidia. All have been great stocks. But if you believe in capitalism, then this surge in pricing should drive either new entrants, or new technology. New entrants, particularly in China, have been kneecapped. But I wonder if Google and a new technology with quantum computing changes that? I am always reminded how propeller driven flight was the dominant engine type, driving larger and more complicated designs, until near the end of World War II, the jet engine was perfected, and within a few short years, the jet engine was everywhere. Quantum computing potentially offers such a shift.

One interesting area is where break through in quantum computing destroys bitcoin. If mining bitcoin with quantum computers becomes much easier, does this take away cost support for bitcoin? And does this matter anymore? Another area for more work.

Fertility

There are some uncomfortable aspects to the failure of fertility rates to show an upward shift. Firstly, we have to consider that perhaps that urbanisation naturally reduces fertility rates - mainly just how difficult it is to afford having a family in a city. And the baby boom of the post World War II period was just a catch up period to repopulated war torn regions.

Secondly, it has been suggested to me that male testosterone levels are falling globally, through lifestyle and other choices. Is this possible? I know in Japan there has been a recent phenomenon where boys have stopped being taller. After a long period where average height in Japan for students rose almost every year, there have been signs of this stagnating. I have to admit, I find this all circumstantial, but maybe modern life is not creating enough men who want to become fathers? Certainly the rise of “incel” culture points to a problem of some sort. Anyway, I plan to continue my work on fertility.

Is China Smart Or Stupid?

I can’t work this out to be honest. In contrast to the US, China has regulated its tech sector relentlessly. This has led to falling prices and intense competition. Alibaba, which used to be one of the must own stocks, along with the Fang stocks, has languished for years now. At USD200bn market capitalisation, it hugely trails US mega tech.

Is this a smart play by the Chinese? To reduce income inequality, and improve Chinese competitiveness? The US focus on America first has certainly been good for the stock market - but Chinese focus on free trade has seen it come to dominate trade with countries in Asean.

Is China just allowing an image of stagnation to be projected as its gain more power and market share? Or has the move away from capitalism, and more state control really dulled the entrepreneurial spirit, that China is headed for a crisis of some sort? While Chinese trade data is good, Chinese bond yields are pointing to crisis. Working out whether China is failing or not makes a huge difference to all assets.

Do We Need Government?

Part market, part philosophical question - but does society need government anymore? Big government grew with the needs of the industrial world and industrialisation of war. But as even Eric Hobsbawm in the 1990s recognised, modern corporations can now do many of the functions that governments were originally charged with - postal service, healthcare, utilities, road building, space exploration for example. On top of that, it is likely that the databases of big tech have more data on citizens than governments do. Crypto currencies could take over the issue of currency. Are we moving from nation state democracies to corporate led techno anarchic states?

The gap between Chinese tech valuations, and US tech valuations would seemingly imply that US has already embraced the corporate led nation state. And we have the example of the East India Company to draw from, and the current Trump re-election and cabinet definitely echoes in some respects.

The Implications Of Drone Warfare

Recently the war in Ukraine has relied on drones to attack and harry the enemy. Due to signal jamming, it has already embraced AI in drones to target and attack. What does this mean for modern warfare? Could China launch a 100,000 drones to effective shutdown Taiwan, or harry it into submission? What if any countermeasures exist? Does the computing power needed mean that big tech are already a military force?

Conclusion

Macro based investing worked in one shape of form for 50 to 60 years. But the last few has been not so good. My view is that we were in a long period of stagnating technology, where market share and profitability was determined by relative costs. But in a new era of rapid technological change, and geo-political confrontation, technological prowess is the major determinant of returns. Its an area of focus, be it ART or Quantum Computing. If that is interesting, then please become a subscriber, if you are not already.

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I had a surprisingly competitive haiku competition, but as the Highlander said, there can be only one. The winner is Kevin - who now has been comped 6 months access to paid content.

Kevin

Bull slips on black ice—

Frantic dance of hope and fear

Fortune rolls her dice

For me it captures the fascination of markets, and while a haiku format also manages to rhyme - adding a nice western feature. Good job. Honourable mention to Eric’s effort:

Eric paradis

In a haze, it gleams,

Bitcoin's dance, a gambler's dream,

Swaying with each sip.

The full list of entries are below. Entries that were posted to substack included the link to the user - entries emailed to me directly just have initials so they remain anonymous.

In general the sentiment was bullish gold, mixed on crypto, bearish bonds - and whole bunch of other stuff.

Thank you for your efforts - I enjoyed them all.

Tony Sanders

Money Like Blossom Falls

Then Dissolves like snow in spring

Leaving the old poor

Leonid Mironov

No choice but to grow,

Domestic demand shapes all,

Spirit of Liu Yan.

Conrad

Rising sun whispers,

Emerging hopes, cautious steps—

Growth on shifting sands.

A Walking Gentleman

The bond market moves

While fiscal spend roars higher

Liquidity swells

ES

Gold whispers softly,

In the twilight's amber glow,

Dreams of wealth take flight.

Matt Dreith

Wise old man sunsets

His empire born of fiat era

Lord Satoshi soars

Michael

Bond book rests boring

Interest fills deep cash pond

Watch snail crawl up Fuji

Thomas Wolf

Earth Mars U.A.P.

Knowledge shared un-Moored A.I.

Reboot young eterne

Mat Casey

Roots break stone apart,

Labour grows, capital fades,

Prices pierce the sky.

The Blind Squirrel

Squirrels gather gold

Gold shines brighter than bonds

Nature's wealth prevails

Hussein Nasser

Michael Saylor Rich,

Value Investor is Poor,

Way of new macro.

Kris

All’s governed by time;

Growth is inevitable,

But so is decline.

Yuri

In the forest,

cicadas pray to mauled bulls,

endless deafening songs

Peter Obermeyer

Prices, like rivers

Oscillate in old channels

‘Til banks loose control

BR Kelleran

A bubble in time

Hot air and Fartcoin rises

A rug pull coming

Andrew Vermeer

Enough is enough

Mother hen gathers her chicks

Oh but not you BRICS

Kris

All’s governed by time;

Growth is inevitable,

But so is decline.

Andy Fately

While bears hibernate

China shops are terrified

Beware the spring thaw

Andy Fately

While it may seem short

Eight seconds is all you have

To ride the bull home

Kevin

Bull slips on black ice—

Frantic dance of hope and fear

Bears watch from the shade

Kevin

Bull slips on black ice—

Frantic dance of hope and fear

Fortune rolls her dice

CZY

A bear on a floe

Struggling in liquidity

"HODLing" for dear life

BK

Look! Number go up

Why analyse, just ton it

Dying words - yolo

JK

with bright sun above.

will the tree grow to the sky?

look! eye of the storm.

CI

dedollarisation is

like a tempest it will arrive

slow then all at once

LG

I see a buck

He looks me in the eyes

Do I shoot or wait

RD

Swift market swallows

Dart through storms of data points

Finding signals clear

JF

CPI printed

Gold glittering, crypto yeets

Safe in my bunker

JL

Shiny metals rise

rocketing for many years

Sitting and waiting

RS

After an eternity

Release comes, a smelly fart

The wind rises

GR

Crystal lake below,

ten thousand whispers promise,

ice cracks underfoot.

EW

Satoshi’s moon shines

It has never felt closer

Yet the earth so far

TK

When moon, diamond hands

Road not taken, old macro

Personal mountains, guiding stars

LP

Fast hands grasp at clouds

Greed ascends, patience left below

Gravity waits, still

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Is there a digital world out there not been caught by traditional measures of GDP? It is a mind bending concept, but a very interesting one. Measuring GDP has been a family pastime- my grandfather produced the first estimates of UK and Soviet Union GDP in the early 1930s and 40s - which from memory included counting the number of tractors among other things. The question I wonder about is how do you correctly measure digital activity. If a Japanese Youtuber earns advertising revenue from Brazil via a US Corporation, but headquartered in Ireland for tax purposes - how exactly is that activity measured? And does it belong to any nation, or does it exist solely in a digital ether? The first hint that perhaps GDP is not capturing activity comes from US financial assets. There is no question that US corporates dominated the digital world, and while the activity could happen in an unmeasured ethereal nation, the profits are definitely reported by US corporates.

If we look at US net worth to GDP, we can see that since the mid 1990s, when the internet was first popularised, there has been a steep rise in net worth to GDP. From 1950 to 1990 or so, US household net worth was 350% of GDP. Today it hovers around 550%.

Typical analysis would assume that the assets are overvalued, and it easy to make that case. But lets assume markets are correct (which is always the best place to start in my opinion) - we could say that this implies there is 17 trillion of missing GDP. For me, I find this an interesting calculation. In a post from a few year ago, I wondered where the missing NIIP was? Net International Investment Position is measure of a countries net position in investment terms. It captures investing inflows and outflow, as well as valuation and currency moves. As it is a net number, and is done globally, theoretically is should add up to zero. But it doesn’t. And in recent years this missing NIIP has been expanding rapidly. This is an slightly out of date chart - US NIIP is now negative 22.5 trillion.

This NIIP gap has gotten progressively bigger over the years.

I first became interested in NIIP as they seemed a good timing tool for when an currency or a nations assets were getting overvalued, but it has not worked with the US in recent years - because maybe the investment is not really into the US, but into a digital world. The other way we can easily see and value a digital world is of course crypto currencies. There are no gold reserves, military or even land to support these assets - but the market gives them value. An estimate of their total value today is USD 4 trillion, larger than most stock exchanges outside of the US. It has value plainly - but where is the associated GDP?

Certainly crypto has some correlation to a digital world, but how exactly is still a mystery to me. Is it a useful currency for a world that is detached from the real world? The value of crypto is now higher than the amount of US dollars in circulation. That would seemingly imply a level of activity greater than US GDP?

One big problem with the digital world is that it is in corporates and certain governments interests to divert digital flows to avoid tax - with Ireland being a world leader here. Using WTO data, we can show the 10 largest digital exporting nations. On digital exports Ireland is the third largest nation, while on an import basis, it is almost as large as the US.

If we take nations like Canada it has USD80bn of exports, and Israel has USD63bn, which both pale in comparison with Ireland USD328bn of exports. Also unusually, Ireland is a net importer of services. WTO provides a breakdown of Canadian digital sales to show that exports would be only 20% of total sales. To me, this implies that about USD300bn of Irish exports and another 300bn of imports have been moved there from the US for tax avoidance purposes.

On a combined import/export basis, Ireland 60% the size of a digital US, larger than India, and roughly equivalent to the UK. The implication for me is that there is certainly a large amount of activity that passes through Ireland, that should really be passing through the US and the Europe. If you think that total US exports is USD 3 trillion, Ireland is doing 300bn of that in very high margin software business, the scale of missing activity becomes clear. If US as whole has 30trillion of GDP with 3 trillion of exports, 300bn of software exports from Ireland could be worth 6 trillion in GDP (adjusting for high margin). Assuming Ireland is not the only tax avoidance centre for digital corporates, perhaps USD 10 trillion of activity is not being caught in traditional measures? That would be a Germany, Japan and India size GDP. Adding that back to US GDP, would then put the US at 40 trillion GDP. That would be US net wealth to GDP at 4 times GDP - a level last seen after the GFC.

Even though I love macro indicators above, when macro and market disagree I bow to markets. Markets always know before macro does, and they are saying the “offshore” digital economy is much larger that we realise.

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When I look at the politics in the West, it still seems wildly inflationary to me. Trump re-election implies tariffs, more defence spending, and little to no austerity. For me the risk is that long long dated treasuries sell off as they did in 2022.

My favourite lead market, the 30 Year JGB market continues to relentless push to new highs, in stark contrast to the behaviour before 2020.

Trump re-election, French and German politics, and ongoing War in Ukraine and Middle East are all inflationary. The potential for trade wars, and so far well behaved commodity markets all point to stimulus, and I had assumed China would conduct stimulus as it did in 2017 after Trump was elected the first time. Instead, Chinese bond yields have collapsed.

I want to run a competition to find the best finance haiku. This has been inspired by my recent post, “No Country For Old Macro”, when a subscriber left the following comment:

Macro = atlantic ocean with 100m height of waves

Investors = the sailing ship

Only the macro huge sailing ship may survive in the wavy Atlantic ocean especially during the storm.

Poor retailer = sure die in the Atlantic ocean

For me it has haiku qualities - referencing nature to make a deeper point. As it so happens I am near Montserrat so was feeling inspired to turn this comment into a haiku - not hard with this view:

I took the comments above and here are my efforts. First two on risks in the market:

Easy breeze, strong current

Mr portfolio goes ever higher

Out of sight, winds rise

Or alternatively:

Acorn has grown over time

Mighty oak - summer tree

Winter snow, heavy weight, bough snaps

These are a bearish haiku What would a bullish one look like?

On US dominance:

The bald eagle soars so high

Old eyes follow up

Has she left them behind?

Or perhaps for the crypto bulls:

Promises flow like water

But I need and seek only one

Proof of work - bitcoin

Think you can do better?!? (I really hope so!) I am offering a free 6 month paid subscription worth 380,000 Korean Won(!), or a signed cap by (potential) motor sport star Jarrett Clark, or 30 min zoom chat with me - whatever you fancy. You have one week - you can reply directly to this post or in the comments.

If you have never written a haiku they are a poem of three lines with 5 syllables in first line followed by 7 and then 5 again. It should reference nature in some way. Good luck!

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I turned 50 early this year - but like most men still think I am young. It only really hits home that I have aged when I catch up with a group of friends the same age. Sometimes its the grey hair, sometimes its the bald spots, or sometimes its the universal doom and gloom about markets, and I think “Wow - I am really hanging out with a bunch of old guys!” Having a doom and gloom view about markets really does show your age. Talking about the year 2000, 2001, 2002 or 2008, which were bad bear markets just dates you these days. In the big scheme of things, they were just buying opportunities.

Having started in markets in that period, and having seen the long depressing Japanese bear market - I was always more “old man” in my thinking - but being stuck in your ways when the world changes is the ultimate old man trade- like insisting and old Nokia phone is better than iPhone. To be fair to myself and other old men - around 2007 I though China and emerging markets was dead money (and foolishly assumed this would hold back the US). HSCEI is not even at half the level it reach in 2007.

My first investing model was the MMM model - macro, micro and market, and it was pretty good at calling the top in China and emerging markets. Macro was current account deficits, exchange rate and money supply among other things, micro was how key industries were acting and investing their own capital. Market was basically investing when market action confirmed micro and macro. The good thing about this model was that it could be used for long and short investing.

The macro part of my MMM model turned negative on the US back in 2016 - some 200% and 8 years ago. It also turned negative on the US dollar - so you cannot dress it up - its a failed model. I tied to save this model by adding a political element to it - which I called motivation so I could call it the MMMM model. This birthed the pro-labour trade - and GLD/TLT as well. While GLD/TLT has been good - it also made predictions about asset markets being stagnant, or at least US dollar weakness. This has been wrong.

As I have been contemplating these failed models, I have also been ruminating on ideas of empire, the rise of a digital world, and tech for awhile - and have started to think we can fold “old school macro” in to tech and industry analysis, which would create a model that explains the modern world. What I have been thinking about is the vast technological change we are undergoing at the moment, and what precedents we have to think about. 100 years ago the US birthed the auto industry as we know it. This fundamentally changed society - but also changed the US place in the world. US industry quickly dominated the auto industry - and the US became the dominant nation.

Post World War 2 - US dominance of the the most important industry in the world - the auto industry- was coming under threat. FDR led unionisation of the auto industry led to US firms becoming uncompetitive and suffering at the hands of German and Japanese auto firms. This led to a US trade deficit and falling gold reserves. The US left the gold standard - and modern day macro investing was born. With the gold standard, making predictions on currency or interest rates were largely unnecessary - fiat currency created the conditions for macro investing.

The auto industry is generally estimated to be 10 percent of GDP for most nations, running from manufacturing, repair, sales and financing, but you could also include things like road maintenance and repair. From 1960 onwards, not only was the US importing cars, but the crude oil to run them. Japan, Germany, Saudi, Canada and Mexico all grew wealthy (some more than others) on the back of supplying US auto industry one way or another. However over the last ten years changes in technology has changed all of this. First of all, th shale revolution has made the US is energy self sufficient - which destroys the connection between US growth and energy suppliers. That is a booming US does not necessarily make Canada or Saudi wealthier.

Secondly, with the world moving to electric vehicles - the US has the leading company in Tesla. For decades, Toyota was worth more than Ford, the leading US car company. But since 2020, Tesla has been far more valuable than Toyota. The traditional conduits via which US growth is spread to the rest of the world have been or are in the process of being cut. Industry analysis has eaten macro analysis, or at the very least changed it completely.

Another feature of Western dominance and now mainly US dominance is a political system that allows the masters of new technology to assume political control. The ability to absorb the masters of new technology into the political system is underrated feature of the West- mainly because the existing old order bitterly resent it. A typical old man gripe would be about the new wave of populist leaders. But one thing common about populist leaders is that they are much more effective on social media. What is interesting about Trump Mark 2.0, is that social media, and new tech leaders have lined up with him, far more than in his first term. Politically, it is hard to see how bringing in the new leading industries into the political world is a bad thing for the US. You can compare and contrast with Volkswagen that is facing a existential crisis, and has to deal with state government owners wishing to keep old engine factories open.

One of the best university courses I did was called “Asian Giants” and compared and contrasted how India, China and Japan dealt with the Western Powers and their Asian colonialism. India just accepted them as another ruling class - and eventually saw deindustrialisation as British rulers saw no need in encouraging competition. China rejected all Western influence - and saw its nation carved up by Western powers, while Japan embarked on a process of modernisation - which saw traditional leadership move from the samurai class to the merchant class. Within 20 years Japan had kicked out the foreigners and began to build its own empire. Japan also had to go through a violent political reconfiguration - the Meiji Restoration - but ultimately a strong Japan was achieved.

One of the things that “old men” often fixate on is the dominance of the US in equity markets. Many, many macro careers have been destroyed by trying to catch a mean reversion trade, that is betting on emerging market or Europe rather than the US.

But this chart is driven by two big technological trades. First modern cloud computing means that the need to use local companies for anything is unnecessary and pointless. Economies of scale drive everything to the US (he says as he uses San Francisco based Substack and Stripe - while writing a note on macro investing while in Spain). This is different to say the mobile phone boom in 1999, where Vodafone was the largest stock in the UK. The second feature is that the US and China have stolen a march on Japan and Europe in electric vehicles. This reliance on lagging technology is probably why the Euro and Yen has been such poor currencies, and why the US dollar has been strong. Chinese Yuan has been also better than Euro or Yen. This probably explains why currency has also been the other killing field for macro investors. Short dollar trades have been very poor.

Putting it all together, from a tech perspective China is the only threat to the US. Japan and Europe have missed the boat on cloud and social media tech, and are badly compromised on EV, while China is competitive in both these areas. On drone technology, which modern warfare seems to be based, China is probably ahead of the US. For me, we are now at an interesting political, tech and macro crossroads. Chinese and US politics has diverged radically on tech. In the US, we have Elon Musk as best buddy to Trump, and big tech is close to big power. In China, they have chosen to regulate tech move heavily, and encourage far more competition. This has led to the Chinese Yuan outperforming Euro and Yen, but not translated into better equity performance.

Macro trading, as far as this old man now understands it, was the result of US technology propagating across the world, and in some cases, like Germany and Japan, taking this technology and improving it. This led to shifts in currencies, interest rates and growth rates. But new technology has led to a shift back to the US. In areas like cloud computing or social media, its hard to see that shifting back to Europe or Japan without government intervention. In EV, we can see that China has probably already stolen a march on Europe and Japan, and is already squeezing Tesla in China. China already has used government intervention to keep cloud computing and social media in domestic hands. Using tech changes to think about macro changes means I think we only see big changes in markets when Europe and Japan get serious about industrial policy. For that, they need strongman politicians, and not the lawyer/banker politicians we have now.

That transition is beginning in my view (Germany, France and Japan all going through political transitions). As my university course taught me, the country that can break down the old industries to allow new industries to thrive will be the ones to buy. Macro is a now a tech and political question - something old macro investors are not good at. There is no country for old macro.

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I am generally of the view that risk can not be destroyed, but it can be transferred. Or in other words, you can protect one asset, but normally at the cost of another. There are lots of versions of this type of thinking in economics - beggar-thy-neighbour devaluation currency policies, helps businesses but reduce domestic wages. Central banks and governments can control either the exchange rate or the interest rate, but not both. Fiscal deficit spending, should be accompanied by higher interest rates, and a weaker currency. Emerging market investors are very familiar with the trade off - what the government gives you in spending, the currency markets take away with currency weakness. For example, Brazil is running a 10% of GDP fiscal deficit - much large than in the 2000s.

And like the US, the equity market Brazil has done well. The equity market is not far off highs.

But Brazilian has suffered a weak currency due to this spending, so the USD returns to Brazilian assets have been poor. Below is EWZ, a USD ETF that track Brazilian stocks. Currency weakness has overwhelmed equity performance.

The US, particularly since Trump has come to be a political force has had similar fiscal balance to Brazil - and with Trump’s re-election is likely to go wider.

As you should be aware, the US dollar has been strong, and US asset markets have been very good. S&P 500 looks nothing like EWZ

Theory and practice would have suggested that the Trump Trade should have seen good equity markets, but weak US dollar and much higher interest rates, and yet currency markets and interest rates have been very supportive. Certainly, this is what happened back in the 1970s when government spending was also growing rapidly. Dollar weakened dramatically, and interest rates spiked. Why is it not happening this time? One big difference is that the US consumer is not as important to commodities as it used to be. In 1970s, the US was 30% of total oil consumption, but now is only 20%.

Even more importantly, the US is not the main player in the tradable oil market. China is by far the major importer of oil

And this probably hints at the secret to the “Trump Trade”. The combination of fiscal spending, and aggressive policies to contain Chinese economic growth means that there is much less transmission of expansive fiscal policy to commodity markets. Collapsing bond yields in China point to the Trump trade likely continuing to work.

Another way to think about it, is that the market has definitely noticed that the US government now treats fiscal deficits as a free lunch, and hence we have seen gold outperform treasuries (my GLD/TLT trade). Here is a long term graph of that trade.

Generally speaking, gold prices and oil prices moving in different directions is unusual. This year gold is up strongly, while oil prices are down.

For lovers of ratios, oil has rarely been this cheap compared to oil, and even more so when not in the midst of a recession, which is what typically drives oil cheaper than gold.

This analysis would seemingly imply that the only constraint to US fiscal policy is the price of oil. There is some evidence to support this view. When the Soviet Union started to go into decline in the 1980s, falling demand and prices coincided with the 1980s and 1990s boom in the US. You could think that US asset prices and economy expand until they meet a physical constraint. Deflation and stagnation in the rest of the world is therefore “good” for the US.

China has not collapsed like the Soviet Union (yet), but its bond market is pointing to economic stagnation. Economically the Trump Trade could keep going, but there are two unknowable risks, related to China and Trump. First, in 2017, China began a stimulus program that pushed commodity prices higher. There is a risk that they repeat this policy. The second risk is that China sees the likely success of Russia in Ukraine, and decides to move to a war footing on the issue of Taiwan, which would be a very stimulatory policy change. The Trump re-election makes both more likely - but as long as Chinese bond yields are falling, the Trump Trade looks like a winner.

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One of the things about finance is that markets tend to trend, and people who make money get promoted. If you get a twenty to thirty year trend in markets, then all the people in charge will be people who 100%, total believe in that trend. And when it changes, they cant believe it has really changed - “old dogs can’t learn new tricks”.

When I started in markets in the late 90s, early 2000s, all the senior people tended to be bearish/skittish about bonds. That’s because the great bond bear market of 60s, 70s and 80s, had wiped out anyone who thought bonds was a good investment.

To be fair, while the US treasury has been in a bull market since the mid 80s until 2020, there were plenty of other sovereign bond bear markets - Latam almost constantly, and even Europe in 2009-2011. But these bear markets were not inflation driven, but currency driven bear markets - which is my view are very different things. But the idea that bonds were dangerous was something that ingrained into the senior managers. It led to the invention of the “widowmaker” trade - shorting JGBs. Many leading thinkers declared JGBs as a short from 1995 onwards. All were wrong. Barton Biggs was maybe the one I remember the most, but he passed on in 2012, thankfully before JGB yields went negative!

If I was to make a corollary, I think JGBs are a short now, but most managers who remember the past 30 years would feel very anxious about such a trade. You can see this muscle memory of shorting bonds in how investors have being piling into TLT even as it massively underperforms the S&P 500. The old dogs have learnt to never short bonds.

One of my favourite books is Eric Hobsbawm’s “The Age of Extremes 1914-1991”. I always recommend it to anyone trying to understand why the world looks like it does. The book tracks the rise and fall of socialism, and makes the compelling argument that without understanding socialism, you cannot understand the modern world.

The rise of socialism, and the fear that it generated in the West, particularly after the Soviet Union almost singlehandedly won World War II, led the West to adopt a number of policies to blunt the attractiveness of socialism. Big State policy, with high taxation and strong unionism, where plainly not adopted to maximise profits or wealth creation. There were to reduce the risk of a socialist revolution in the West. When JFK said, “Ask not what your country can do for you, but what you can do for your country” - was not a rallying cry to unfettered free market capitalism. You could call this the “Greed is bad” era of US policy making. While it may seem impossible that Americans could ever see capitalism as bad, two world wars and the Great Depression had not marked capitalism out as a super successful system.

However, by the late 1950s, the problems of the Soviet system was already becoming apparent. Famously, one Soviet described a American model kitchen as “(p)resenting this as the typical home of an American worker is like presenting the Taj Mahal as the typical home of a Bombay textile worker, or Buckingham Palace as the typical home of a British miner”. Although the Soviets were leading in the space race, their domestic economy was backward. American consumer welfare was beyond Soviet comprehension.

The political era of “greed is bad” began to end in 1970s, as the various restrictions placed on business became to be seen as counter productive and inflationary, and the Communist economic model looked to be failing. Various pro-capital policies such as devaluing the dollar, cutting tariffs, anti-union policies were all introduced. Greed is good era began. Gordon Gecko captures the politics perfectly:

“I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms: greed for life, for money, for love, knowledge, has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”

But the “greed is good” era was marked by a still strong desire to compete against the forces of socialism. The US lowered tariffs, and outsourced much of its manufacturing to other nations. The US also acted as the ultimate peace keeper, and tried to set itself as a financial model, with the Washington consensus policy mix of open trade, and open capital flows. The US also sought to build and support various multinational organisations. The pinnacle of the “greed is good” era was probably in 1999. The US dominated militarily, morally, and technologically. Even the government ran a budget surplus. It was the ultimate proof that “greed” could provide superior results, and the incentive for all nations to become more like America.

The 2000 dot.com bust, and official reaction to it was probably the beginning of the end for the Greed is good era. The emergence of “whatever it takes” central banking, which had a focus on alleviating financing concerns, marked a decisive shift from believing that market forces should be left to their own devices. The reaction to the GFC, reinforced this to a degree, even if politically there was still a yearning to return to the “greed is good” era - and Washington consensus trades of balanced budget, free trade and free capital movements. Broadly speaking, I believe you can see these shifts in the relative movement of gold versus treasuries. The counter trend movement we see from 2011 to 2016, was the Obama efforts to balance the budget.

2016 and the election of Donald Trump has marked the final end of the Greed is Good era, and the beginning of the Greed is Everything era. It is not hard to see why Donald Trump re-election is received poorly in the rest of the world, and well in the US. Under both the “Greed is Bad” and the “Greed is Good” era, US politics also saw the success of the rest of the world as a policy objective. “Greed is Everything” clearly places the priorities of Americans above those of all others. It also muddles the position of business and government in a way that the US sought to avoid in the “greed is good” era. The “greed is everything” era, that looks at everything through a US first prism, is particularly bad for nations that relied on the US to police the world, namely Europe and Japan. The strong dollar is more about the US screwing Europe and Japan, than strength.

The shift from “greed is good” to “greed is everything” particularly hurts Japan, who grew rich on access to the US market, and from living under American protection. The irony of the “greed is everything” policy shift, is that it favours China, which has seen its relative exchange rates against the Yen rise to highest level since the mid 1990s, despite Chinese wages rising hugely over that period, and Japanese wages stagnating.

We can also see the US government is being run under more corporate principles. Anyone familiar with modern private equity will recognise that the level of borrowing that a private equity owned company takes out is only limited by the amount a borrower will lend (or more correctly, borrowing will be done to maximise the value to private equity owner, not for the benefit of the business). US government borrowing has definitively moved to a private equity ethos. In true private equity fashion, a “greed is everything” government will only stop borrowing when the markets stop lending.

Why anyone thinks lending to the US government for 30 years at 4.5% is a good idea remains a mystery that future financial historians will puzzle over. My target remains 10%.

The most obvious trade in the “greed is everything” era is long S&P 500 short treasuries. Great trade.

When I think about markets, my first port of call is that the “market is always right” - and then think about what that means, and where markets are wrong. Market is right about S&P 500 v TLT in my view - “greed is everything” era is good for stocks, bad for bonds.

The idea of a “strong dollar” is probably wrong. Suring gold and bitcoin tell you that the dollar is not strong. But the “greed is everything” era is very bad for Japan and Europe, who are rapidly turning into regional weaklings, reliant on the two great powers - China and the US. Both Japan and Europe are in need of institutional reform in this new era. Historically neither has reformed without war - either international or civil. The smart move from Europe and Japan would be to begin to play China and the US off each other. Both countries need a strongman leader to achieve this - there are no obvious candidates at the moment. My bet is that the “greed is everything” market continues until the US realises that its policies strengthens China’s position, rather than weakens it. I do not know when that happens. In the most recent period of American First policy making, before World War II, strengthened the hand of the Nazi’s and Soviets. A similar blunder is occurring now - again explaining the dismay of Trump’s election in the rest of the world.

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In a previous post, I said I looked at energy use per capita to determine the development of an economy. I highlighted this as it looked like computing digital data was going to cause an inflection in energy use in North America - the “digital world eating the real world”.

I tried to analysis the digital world in the same way. I started by asking Chat GPT how much digital data does the average person generate - and it gave me the answer of 1.7MB of data per second - or 146GB per day. ChatGPT gives a forecast of 149 zettabytes of data generates in 2024, which I suspect is taken from the same source at Statista seen below.

Adjusting the above data to gigabyte per day gives 2024 data production at 69GB per day, rather than 146GB. We could assume the difference comes from penetration rates into the digital world, which is around 60%.

What is odd is that the data generated has started to grow much faster than the number of users of social media. Social media use is looking ex-growth in recent years.

But when we look at data created per social media account, it sky rockets in 2020. This could be a Covid related change - where people changed habits over night, and never went back

Or it could be a TikTok inspired change. Certainly TikTok caused more people to upload videos of themselves (and cats and dogs).

If TikTok is driving the data explosion, then it is upending the traditional way innovation and technology spreads. TikTok is far more popular in emerging markets than it is in the developed markets. Japan, UK, France and Germany are not top markets for TikTok.

This suggests two things. First, that the typical emerging market-developed market divide in “digital data creation” - at least in social media terms - is far smaller than you would think. If we were using the energy analysis - it would seemingly imply that in the digital world, there are no real developing nations. If you are connected, you are a data producer.

Secondly, as far as data harvesting is concerned, TikTok may well be more dominant that Facebook, Google or Apple. To my surprise this implies that the US and China may well be closer to parity on harvesting global data - with both acting to protect their home markets from the other. If China and the US have parity in data harvesting, then the real fight is in data analysis. To use an energy analysis, it would be like finding that everyone could produce crude oil, but only one nation could refine it. And the US monopoly on refining is built on controlling the supply of Nvidia chips.

What does this mean? Well, unsurprisingly, the market has got things pretty much right. The digital world, is a global phenomenon, with connected users generating similar amounts of data wherever they are - as long as they have a smart phone and are connected to social media - particularly TikTok or Instagram. The US is looking to maintain a monopoly in the distilling of that data into useful forms, and the sheer growth and size of the data industry is pushing semiconductor usage and pricing to extreme levels. But the TikTok data above suggest Chinese versions of Chat GPT will be particularly good in emerging markets. I thought Chinese influence could maybe be contained to Asia - but in the digital world, Chinese looks to be much more global. The big issue is where Chinese technology can work around the restrictions on high end chips. If it can, a digital divide between the west and rest beckons - as Chinese AI tech will have access to the most data for training emerging market LLMs.

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