Investment Newsletter – February 2024
According to BofA, Fed causes bubbles and Fed pops bubbles and in 2024 Fed’s determination to cut rates means “we’re not too far from it… It paid to be “dogmatic bear” in ’22, a “pragmatic bear” in ’23 (at least until Oct), and “cynical bull” past 5 months into ‘24″ and notes that cynical bulls are determined to stay long until the day before Fed cuts, until the combo of BofA Bull & Bear Indicator >8, 10-year real rates >2.5%…and SPX trailing PE >25x (currently 23x), all scream “run-for-the-hills”.
A simple framework for election: the impact on Wall Street is the macro conclusion election winner will draw from result of the actual election; i.e., a “Biden win” scenario means unemployment matters more than inflation, so more negative for bonds. A “Trump win” scenario means inflation more important than unemployment, so positive for bonds. It is noted that both Biden and Trump candidates are tough on China (so buy China just before election), and neither likely to campaign on “balancing the budget” (fiscal deficit 7.5% of GDP under Biden, 6.6% under Trump, both biggest since Great Depression/WW2).
Without major reforms to mandatory spending programs such as Social Security and Medicare, or large tax increases, the primary deficit is expected to persist. This leaves the rate of economic growth relative to interest rates as the crucial factor determining the path of the debt-to-GDP ratio over the next few decades. Current projections of GDP growth are relatively low, lower than after WWII. However, new technological advances, such as A.I., could fuel a productivity-led boost to long-run economic growth. Events abroad could also increase the foreign demand for U.S. Treasury notes as a safe asset.
Top Chinese officials have previously indicated cautious economic policy for this year, opting for targeted measures rather than massive stimulus due to systemic risk concerns and the less favourable comparison to 2023’s post-pandemic rebound. Given a higher base effect with 2023’s growth benefitting from a low 2022 pandemic baseline, a troubled property sector, debt restrictions on high-risk provinces, potential slowdowns in new energy investment, and weak January-February data, achieving the GDP growth target seems very challenging, Nomura Research said in a note.
The Chinese government is counting on tech innovations and industry upgrades as well as to refine its real estate policies to help stabilize the economic outlook. In the major work tasks for 2024 section of the government work report, the top priority is to vigorously promote the construction of a modern industrial system and accelerating the development of “new quality productivity”. China is also aiming to promote innovative development of its digital economy through the ‘AI Plus’ initiative while consolidating its leadership in industries like intelligent new-energy vehicles. While China may catch some manufacturing and export tailwind from the US re-acceleration, the key target for the Party is clearly to build a Chinese middle class that can support and drive the Chinese economy for the coming decades. This will necessitate a complete shift in government focus from accelerating the real estate sector to continually focusing on putting more money in the hands of the consumers just as we have been doing in the West for the past 4-5 decades. This means stimulus, welfare programs and foreign investments, which was another focus of the speech, UOB and Steno Research said in a note.
