One week / one topic: Existential

What happened?

On the surface of things, nothing very unusual is going on.

Central banks keep doing their thing:

• All eyes remain on the Fed to figure out who’s gonna be its next Chair

• The Bank of Japan is now expected to hike rates in December

• The ECB remains on hold given inflation is near its target

Macro data keeps rolling in:

• US ADP payrolls surprised on the downside, giving cover to monetary doves

• Chinese PMIs remain lackluster

• European politics remain messy, this time with Germany (!) and France in focus

Prices keep fluctuating:

• Significant equity rotation remains underway at the region and sector level

• Even within AI stocks, there are new (perceived) winners and losers every day

• Currency dispersion is loosely mirroring fiscal and policy developments, with JPY and GBP in focus as of late

However, the lack of excitement in terms of price moves at the aggregate level is perhaps to be expected then, since – taking a step back – we can observe how, over the last 20 years, markets have arguably grown more and more immune to anything that is not existential.

When you think about it, only a handful of events actually qualified as major scares linked to drawdowns of at least 20% for global equities: the Great Financial Crisis, the Eurozone sovereign debt crisis, Covid-19 and the 2022 inflation emergency.

This might well make sense in a fiat world, where the pen is indeed mightier than the sword and policymakers can keep coming up with new, creative solutions to the emergency at hand. (Hint: it usually involves printing more money)

Alas, there are (at least) two problems with this:

1. While nobody knows where the limit is in terms of debt levels and money printing, we are clearly moving very fast in the wrong direction… with no sign of slowing down.

2. If AI is the answer, with its promise of boosted productivity and a new era of abundance (let’s hope!), we need to produce A LOT MORE energy. Unfortunately, this can only happen in the physical world (I.e. more sword than pen, if you will) and we are increasingly facing hard constraints.

Inevitably then, the race for the AI panacea has already morphed into a great power competition between the US and China.

Both countries seem to have internalized the wisdom of the Romans – “si vis pacem, para bellum”, or “if you want peace, prepare for war” – and, while it remains impossible to predict who is going to win, it feels highly likely that this strategic confrontation will meaningfully impact asset prices.

What to do, then?

Our observations

• Fundamentals: Growth, demographics, culture, geography, infrastructure, technological advancement and much more all come into play here. Developing an awareness of the strategic priorities of each country’s leadership might then be useful in terms of mapping out the constraints they face, and trying to go with the flow when making investment choices….

• Price action: The AI race is increasingly driving up the price of various metals and rare earths as much more energy capacity needs to be built. Is this already (more than) fully priced in across asset classes?

• Investor beliefs: Investors are also humans, and the awe for the new AI tools at our disposal might at some point turn to rage against the machine. Is regulation then perhaps the biggest risk to continued AI dominance, if and when people demand an end to radical disruption?

So what?

Rater than trying to divine what’s next for what is an incredibly complex field, we can perhaps rely on price action to help us face in the right direction.

The price of copper then – as an essential component for further electrification and data center construction – is sending a clear message.

And yes, of course, this is not an infallible indicator and things might well play out in any number of different ways.

That said, with apologies to Pericles, it very much feels that “Just because you do not take an interest in AI, it doesn't mean AI won't take an interest in you.”

Did we not just say above that markets increasingly only care about existential developments?

Well, there you go then…

Mood music: David Bowie – Space Oddity

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