Gravitas Spark CrowdFunding

Tag: Trump

  • Tech Up And Smell The Coffee

    Tech Up And Smell The Coffee

    Japan is the number one coffee-to-go consumer in the world. It wasn’t always so. For 12 centuries the Japanese were a tea-drinking nation while a stigma attached to coffee and its miniscule 1% market penetration. Early commercial attempts to expand coffee consumption in the 1970s were a disaster. Contrast that with today where Japan’s best-in-world urban centres are served by a massive coffee culture. In fact, 48% of all coffee consumption is coffee to-go beating the likes of the US (45%), Australia (23%) and UK(17%) to global top spot. What happened? Well, Nestle spent a fortune in the 1970s and failed. Then, they hired a child psychologist. Nestle knew the existing tea culture (ceremonies, 90% domestic presence etc) was in the national DNA so they ignored the adult consumer and focused on youth tastes. Literally taste. They didn’t sell coffee.

    Nestle sold coffee flavoured candy, then snacks, then ice-cream. Of course, kids grew to love the flavour. By the 1980s vending machines and canned coffee were everywhere. In the ‘90s, when I was living in Tokyo, the marketing push had entered “genki drink” territory  associating nostalgic childhood flavour with increased productivity and professional success. Fast forward to today and the 30-year re-wiring of Japan’s taste buds has created a coffee market worth $12 billion consuming 7 billion cups annually (Source: Statista). So, as my Bullet train races away from Hiroshima, I can’t help thinking about generational shifts and how advanced technology (A-bomb) was part of a nation’s destruction but was adopted by subsequent generations to lead its future. Japan might be considered conservative but there is a boldness attached to their use of technology. World-leading in fact.

    Japan might be considered a strange leader-location for cryptocurrency payment/usage given its reputation as a cash-preferring economy. Wrong. Most of my trip payments here have been done on my phone but there’s more to report. In a number of retailers I have seen iris-scanning orbs supporting the Worldcoin crypto ecosystem set up by Sam Altman (OpenAI founder). For me, the big evolution to come in crypto/blockchain is payments ie the ‘currency’ actually being used. To date, the emphasis has been on cryptocurrencies and stablecoins as stores of value or investment instruments. Interestingly, there is a strong piece of Japanese DNA which lends itself to the use of tokens instead of cash. Ever heard of Pachinko? Here’s what we wrote about it back in 2023…

     

    “Ever heard of Pachinko? If not, this game’s annual revenues might surprise. Estimated annual revenues of $200 billion are more than ten times those of the NFL! Pachinko is a ball game too but it’s a vertical pinball game played in Japanese gaming arcades. Players twist wheels to steer descending small steel balls into cups which trigger a prize-winning payout of more balls which, in turn, can be exchanged for cash or small prizes. Gambling for cash is illegal in Japan but this low-stakes, low-strategy game exploits a legal loophole and is 30 times bigger than the annual gambling revenue of Las Vegas, as well as twice the size of Japan’s export car industry.”

     

    The key point is that entire Japanese generations have grown up exchanging prizes/tokens for cash. Not surprisingly, I note that Japan’s three biggest banks – Mitsubishi UFJ, Mizuho and Sumitomo Mitsui – plan to integrate stablecoins, blockchain and digital ID into their use of the SWIFT cross-border payment platform. My suspicion is that Japan is going to lead on payments which is the ultimate route to crypto commercial penetration. And, they culturally ‘get’ tokenisation, as well as providing Bitcoin with its pseudonymous founder name, Satoshi Nakamoto. So, if you smell Japanese opportunity, it might not just be you. It could be a robot. Seriously.

    Yep, our digital world has been built on two digits: 0 and 1. So, how can a robot smell? Japanese robotics company, Ainos, has installed its AI Nose in a humanoid robot built by another Japanese robotics player, Ugo. The collaboration introduces a new class of robots that can perceive the world not just through sight and sound, but also through smell, enabling them to make more intuitive and intelligent decisions that will transform industries, public health, and everyday life. The new robot combines a high-precision gas sensor array, real-time signal processing, and advanced AI algorithms to identify and digitize a wide range of scents, turning them into unique “Smell IDs.” Clearly, this is big news for life sciences precision manufacturing, elder care, gas safety etc. Again, it should not be a surprise that Japan is leading in robotics.

    Japan dominates the global robotics market with a 40% share of global exports. No fear of AI here. Of course, given the demographics of a shrinking workforce, it has become a social necessity as Japan turns to robots to care for its elderly population. Like crypto and blockchain payments (vs investment), robots are the natural next step for AI adoption. Nvidia’s CEO, Jensen Huang, is on record as saying that the “ChatGPT moment for robotics is coming…. I can’t imagine a better country to lead robotics AI revolution than Japan. This country loves robots”. Japan also has buckets of engineering talent. Almost 50% of global industrial robots are made by 3 Japanese giants – Fanuc, Yaskawa and Nachi-Fujikoshi. But….Nvidia knows these AI powered robots will need advanced semiconductor chips. Japan might have the latest manufacturing answer in a world where tariffs, supply chains, China decoupling and Taiwan are an increasing source of business worry. So, Japan is going technology “bold” and fearless again.

    Build it and they will come is a tried and failed tech commercialisation strategy. However, Japan is making a $67 billion bet on its semiconductor chip industry without securing any customers yet. Specifically, the Japanese government has passed legislation to allow it to invest in chip manufacturing start-up, Rapidus. The homegrown chip maker is due to produce the smallest chips in history (2 nanometer size for improved performance, density and efficiency) in its Hokkaido-based facility, backed by $27 billion of investment from heavyweight Japanese corporates like Sony and Toyota plus a design collaboration with IBM. In fact, IBM has made very clear that Japan as a next-generation chip manufacturer is “good for the world” given the global economy’s dependence on Taiwan and China for chips. The first chips are due to be produced from the Hokkaido plant in July (rumoured to be for Broadcom) and the latest reports suggest Apple and Google are in talks with Rapidus too. Watch carefully as this would be a massive chip comeback for Japan. On a broader level, Japan Inc can look forward to a re-assessment by global business as a stable supply chain partner with a healthy respect for international trade agreements. Who knew healthy democracy would be a business winner in 2025….? But, we do know health is big.

    Japan is already a leader in the $6 trillion wellness industry with its outsized presence in the personal care/beauty, healthy food/nutrition, wellness tourism and spa infrastructure sectors. However, one senses demographics, AI and robotics will combine to significantly increase Japan’s investment focus in the medtech sector. Typically, European and Irish medtechs have looked to the US for product market entry and venture funding. That will continue, but watch out for an increasing Japanese investment profile. We are often asked by Spark medtech investors “where will the exit come from?”. Well, Japan might need to be added to the list. Indeed, Digital Gait Labs (currently raising funds through Spark) tick those AI, wellness and elder-care boxes very nicely. As for Japan’s investment power, there are a few things you need to know.

    Japan is effectively the biggest creditor or banker to the world. There’s a reason why the Japanese can actually buy more coffee to-go than America and…. intimidate its President. Japan is hugely wealthy. The Japanese population holds a whopping $14 trillion in financial assets, or almost 5x the GDP of France. More strikingly, half of these assets are in cash or deposit accounts. That’s almost 50% of the EU GDP waiting to be used…… possibly by the next less-conservative generation. For me, this is the generational “coffee” wealth moment to start showing opportunities to Mrs Watanabe and her children. And, there’s an early leader.

    We recently wrote about ChatGPT/AI company, OpenAI’s funding round being the biggest public(IPO) or private raise in history. What we didn’t mention was that the lead investor was Japan’s Softbank who have committed $30 billion to the AI trailblazer. Softbank is an investment holding company led by Masayoshi Son whose career has been chronicled by ex-FT editor, Lionel Barber. The book is a fascinating read and the title, Gambling Man, hints at the highs of Alibaba, DoorDash, Uber and Slack as winners but also the losers like WeWork. However, the tagline of the book title tells us more –  “the world’s greatest disruptor.” I strongly believe Son has planted the “risk seed” in this generation of Japanese investors like Nestle did in the ‘70s with coffee. Japan has got “the taste” of private early-stage equity. Now, the rest of us need to show them candy with the same “unicorn” taste as Son has pursued. No psychologist is needed this time, just on the ground observation. Then action. We need to tech up, and show up.

     

  • An Eastern Promise Worth Exploring…

    An Eastern Promise Worth Exploring…

    It is 23 years since I was last in Japan. I still love it. The cultural collision of ancient tradition, mass urbanisation and advanced technology is a gobsmacking experience. And, then there’s the friendly population hungry to learn while blessed with fabulous food, beautiful rural scenery, extraordinary attention to detail, safe streets and a commitment to social harmony. It is perhaps unique among the advanced economies of the world. However, Japan has its challenges. We all do these days but maybe Japan offers a fresh perspective on how to cope with change. I lived in Tokyo for three years in the ‘90s and this visit has been an eye-opener on how Japan is responding to change. So, I have decided to write a series of short articles in the coming weeks while travelling here on topics relevant to European business and investment. I’m currently on a Shinkansen (Bullet) train out of Tokyo on my way to the beautiful Gifu region and wanted to touch on a few early themes. Let’s set the scene.

    A quick glance at the daily newspapers – Yomiuri Shimbun, The Nikkei and The Japan Times – confirms that global trade disruption is the topic du jour in common with almost every other country on the planet. The Japanese economy is a trade-based one, given its relative lack of natural resources. It also had its own MAGA-type isolationist experiment from 1602 to 1863 when trade and foreign visitors were effectively shut out from Japan by its ruling Shoguns. So, it’s interesting to note the Japanese media focus on the “isolationist” aspect of the extremist Trump regime in Washington. Let’s just say the Japanese are a bit sceptical on Washington’s ability to put together a coherent trade framework. In fact, the unofficial feedback from the Japanese trade delegation sent to the White House was damning.

    There was a strong Tokyo view that the American negotiators “have no idea what they want”. Furthermore, this is a Japanese negotiating team which agreed trade deals with Trump in 2017 (TPP) and 2019 (agriculture/industrial products). As long-time Japan observers know, Japanese business and its leaders value relationship building and trust before committing slowly to any commercial deal. The mind boggles as to how Trump’s negotiating team think they will get any deal done with the Japanese while ignoring the terms agreed with Trump himself during his first presidency. Trust in the US is evaporating.

    There has been a global ‘sell America’ trade in recent weeks as the US dollar, US Treasury bonds and US stocks have been whacked by foreign sellers who have lost faith in US institutional stability. Japan is believed to have been the original foreign seller of US Treasuries (it holds $1 trillion (!) of these bonds) which spooked Trump into delaying tariffs on ‘negotiating countries” like Japan earlier in the month. Instead, Trump’s team focused its tariff tantrums on China while giving most countries a 90 day breather. As I write, the White House attempt to shift focus and possibly gather trade “allies” against China is blowing up rather embarrassingly. Indeed, Japan have just said they will not join any co-ordinated trade axis against China as it is too important as a trading counter-party. Sensible stuff. Meanwhile, the CEOs of Walmart, Target and other US retailers have apparently told Trump that store shelves “will be empty in 2 weeks”. Indeed, import activity at US ports has collapsed and the country’s 8 million truck drivers (and MAGA hats) are on stand-by for mass lay-offs. Whoops… not so sensible stuff.

    It turns out China can’t be removed from the US economy on the whim of Agent Orange. In fact, the latest word from the ‘stable genius’ is that tariffs on China will be reduced. No doubt, there will be some spurious ‘win’ claimed by Trump and his blowhard MAGA champions but the silence from China and President Xi has been deafening to all sane watchers of geopolitics. China has been prepping for this trade war for years, and has forced Trump to blink for all to see. However, the damage is already done to US credibility and increases the relevance of Japan as a trading partner for economic blocs in Asia and Europe. So, where can Europe work with Japan in a new world order? I already see a few shared pain points.

    In many ways Japan is a window into Europe’s future. Europe is already in “low growth” phase with its ageing population and high level of risk-averse savings. However, the demographic cliff facing Japan has already sparked a dramatic change in policy. For context, Japan’s working population is expected to lose more than 10 million workers (72m to 62m) in the next 15 years. Yep, ten million. So, it was immediately striking on this visit to Tokyo to see the number of non-Japanese working in the hospitality and retail sectors. So striking that I went to check the statistics. According to a Japan Times report in 2018, more than 1 in every 8 adults living in Tokyo’s 23 wards (cities) are not Japanese citizens. That is remarkable considering when I first worked in Japan there were just over 1 million foreigners living amongst a Japanese population of 126 million across a country roughly the size of Italy. Perhaps the desire to live in Japan is less surprising when you consider in the same time period (from the ‘90s to now) the annual number of tourists has rocketed from 2.7 million to 40 million. However, the true surprise is the policy shift in Japan to allow immigration in significant numbers. Bluntly, despite far right political party activity in Europe, immigration is a necessary part of its future. But…. not the only solution. Japan again is leading.

    Mario Draghi in his 2024 European Competitiveness report highlighted innovation and productivity as a necessary policy focus. In Japan, the use of robots and technology to assist in service-heavy healthcare and retail is well established. I personally witnessed robots in action in Narita airport and  a variety of Tokyo retail settings but the presence of humanoid robots in Japanese nursing homes is also well established. In fact, Japan dominates world robotics, accounting for 40% of the global market. Of course, innovation does not happen without risk capital/investment. While the financial headlines have obsessed over AI and the gyrating performances of “Mag 7” tech stocks, Japan has quietly turbo-charged its investment environment.

    Thanks to policy changes facilitating shareholder activism and takeover activity, the Japanese private equity market has exploded. We often write that the “future is private” so it is remarkable to see conservative Japanese capital markets experience 40% growth in 2024 private equity/venture capital activity. Unsurprisingly, the global private equity giants like KKR, Blackstone and Bain are all over this structural shift. Hedge funds have been racing to set up offices in Tokyo to follow the action too. Back in Europe, Draghi has highlighted the lack of innovation and investment/financial policy coherence across 27 different jurisdictions. Joined up thinking on investment could be as transformational for Europe as it appears to have been in Japan. And if you’re looking for policy endorsement, then who better than Warren Buffett.

    We will return to the Japan private investment environment in greater detail in subsequent articles but the public markets have already received the “Buffett kiss”. Over the last few years Berkshire Hathaway has built 10% equity stakes in each of 5 Japanese trading houses. These trading houses, also known as sogo shosha, are large, diversified conglomerates involved in a wide range of businesses, from trading and investment to logistics and manufacturing. Buffett has invested in the big five sogo shosha –  Mitsubishi, Mitsui, Sumitomo, Itochu, and Marubeni. We have written previously on this Buffett move but way before the Trump tariff tornado hit global markets. And, now I’m beginning to wonder. Did Buffett see an isolationist America coming and deliberately seek out the centuries-old trading relationships established across Asia by these Japanese trading giants? It wouldn’t be the first time Buffett saw a structural shift early. However, it’s not too late for Europe. A deliberate attempt to increase co-operation and relationships with Japan might be a very clever way to diversify risk away from an inward-focused US and explore Asian opportunity. Certainly, the Japanese can offer interesting perspectives and responses to deal with the four horses of Europe’s stagnation apocalypse: trade, immigration, demographics and innovation. Lots to learn, lots to write (or right).

     

  • Beautiful Minds Will Prevail

    Beautiful Minds Will Prevail

    The late Peter Sutherland would smile. Sutherland’s stellar career took in stints as Ireland’s youngest ever Attorney General, youngest ever EU Commissioner, father of the student Erasmus Programme, Director General of GATT and its successor, the World Trade Organisation, topped off with Chairman roles at Goldman Sachs and BP. He was a pretty decent rugby prop forward too. Sutherland’s appreciation of equilibrium at scrum time, laser-like attention to detail and powerful negotiation skills were critical to his success in securing 123 sovereign signatories to the General Agreement on Tariffs and Trade (GATT) in 1993 when the highly complex Uruguay Round of global trade talks were in danger of collapse. He might always have been “Suds” to his friends, but in the international business world Sutherland was the “father of globalism”. And, he truly understood the complexity of global trade agreements. So, what would he make of the Trump regime’s shakedown of the global trading system? Well, as all students devouring legal judgments in the UCD Sutherland School of Law will know, precedent is key. And…..we have Brexit as our stare decisis case study.

    Recall the Brexiteer mantra of “Global Britain” and those fantasy soundbites like “we hold all the cards”, “they need us more than we need them”, or best of all “Britannia Unchained”. Sound familiar? In hindsight, the freedom to pursue new trade deals featured far more chains and ridicule than expected. Britain is still to create the promised bi-lateral free trade deals with the likes of the US and India, while Truss-trumpeted deals done in Pacific Rim countries have had no more impact than if these faraway agreements had been signed by penguins. We mentioned “equilibrium” earlier and this really isn’t just a scrummaging thing. The brilliant Nobel Prize winning research by John Nash, featured in Hollywood’s “A Beautiful Mind”, are the foundation of all game theory analysis applied to trade deals. The Nash Equilibrium is a key concept in game theory where knowledge of other players’ strategies (politics) gives no players incentives for deviating from their own strategy. Hence, we experienced a “hard” Brexit. Now, think about China and the US currently engaged in escalating tariff retaliations. Also, remember the Pacific penguins.

    The Trump trade team seem to believe they have 70 nations queuing up to sign trade deals with the US. Let’s be very clear, and Britain can attest to same, the signing of bilateral trade agreements (two countries in isolation) is extremely difficult to execute. Peter Sutherland would quickly point out that a change in trade terms with one country automatically opens up the possibility of trade being diverted through more favourably disposed countries eg China production switching to Vietnam during the Trump 1.0 administration. Trade is by definition MULTI-LATERAL and requires Nash-like understanding of game theory and trade negotiation. Britain’s trade delegations can sheepishly tell you all about how their Japan deal negotiations went. The short version is that Japan told Britain any new trading terms would be inferior to the EU because the EU was a far bigger and  more important trading partner. Now,  cast your minds back to Trump 1.0 and his renegotiation of an existing trade agreement (NAFTA) with Mexico and Canada. This “straightforward” renegotiation took TWO YEARS to complete. The current Trump trade advisory team are delusional about their ability to close out a series of bilateral trade deals in 90 days. Also, there is no Nash or Sutherland on the US team. In fact, it’s far worse than that…

     

    *Trump’s White House Counsel on Trade, Peter Navarro, and his alter false ego Ron Vara, went on TV last night to claim bond yields (which “didn’t intimidate” his mobster boss) were going down while the rest of the sane world saw them continue their worrying climb higher.

    *US Secretary of Commerce, Howard Lutnick, continues to laugh hysterically in his media appearances and reassured all viewers on Fox yesterday that the US economy would “explode”. Yes, Howard, that’s what we all fear.  

    *If you were hoping AI was going to help frame a complex trade agreement then think again. US Secretary of Education, Linda McMahon, was outside her WWE wrestling comfort zone but still managed to stun a panel discussion this week with her comments on how “A1” would impact teaching. Yep, Linda hasn’t really heard the “AI” term in conversation before, and her reading to date on the topic picked up the AI term as “A1” which is a steak sauce apparently.  

     

    Not only will trade deals not get done there is now a US institutional credibility issue. As I write, the US dollar, US Treasuries and US stock markets are being sold by investors all over the world. Typically, the US dollar and Treasuries would strengthen in a period of stock market volatility so this is HIGHLY unusual erosion of trust in US governance. There is perhaps worse to come. Lost in the crazy headlines this week was a decision by the US Supreme Court to allow Donald Trump to fire officials leading two independent agencies. Again, the critical point is precedent. These officials have the same legal status as that of Federal Reserve governors. Already, Trump is whining about the Fed not cutting interest rates so the possibility of Federal Reserve Chair, Jay Powell, being removed by Trump can’t be ruled out. We should also be aware that the trade war with China could go financial and some commentators are speculating about the US government reneging on US Treasury interest(coupon) payments. A hint of either of these actions would make this week’s market gyrations look like jelly ripples in comparison. And yet, it’s possible we could have an “Orange Swan” event in the global financial system. Also, if it’s black swans you’re looking for, keep an eye on Chinese internal politics.

    President Xi looks like he’s in for the long haul in this trade war with the US, but he’s not sure about his comrades. Latest reports suggest that the second ranking general in the People’s Liberation Army(PLA), He Weidong, has been purged. That level of rank in the PLA being purged has not happened since 1968 during Mao’s Cultural Revolution, and signals some dissent within the Politburo. Regime change in Beijing is a long-shot but most of the action in the near term will be in Washington.

    Business decision-making is paralysed and the charts showing US Economic Policy Uncertainty Index in this week’s Financial Times were unprecedented, surpassing even Global Pandemic levels of confusion. Consumers aren’t feeling much better. The results of the University of Michigan consumer survey has just hit the screens and the commentary is ugly:

     

    “Consumer sentiment PLUNGED 11% this month to a preliminary reading of 50.8, the second-lowest reading on records going back to 1952. April’s reading was lower than anything seen during the Great Recession”

     

    This all reads as gloomy stuff but there’s a potentially “beautiful” outcome not quite in Trump’s strategic vocabulary. Financial markets, business and voters are all aligning in rapid fashion and beginning to smell incompetence. Was it only a few weeks ago that Trump’s security team shared military operational details with the outside world in real time via mobile phone chat groups? This week, team Trump stands credibly accused of almost blowing up the world’s financial markets. Whether you’re a Fox News viewer, or an oil worker in Galveston, or a farmer in Idaho you know something’s up and it isn’t pensions, savings or 401ks. Global trade needs great thinkers not spoofers, and the world is calling this ugly trade bluff quickly.

     

     

  • Truly A Moron

    Truly A Moron

    We are into the name-calling phase of global trade policy. The “Stable Genius” Party told us to “reject the evidence of your eyes or ears” or even the ten trillion dollars of capital destruction. But, enough is enough. Or, so thinks DOGE-whisperer Elon Musk. The focus of his ire is the White House driver of Donald Trump’s trade tariff policies, Peter Navarro. Now, Peter is an interesting chap. He first came to my attention with a series of books featuring hard line views on China and US trade deficits generally.  He then served in the Trump 1.0 administration of 2016-2020 when his “fringe” economist status acquired an unusual qualification. Well, weird. It turns out the globally reputed economist, Ron Vara, quoted in many of Peter’s books was a fictional figure. Indeed, Ron Vara was not just supportive of Peter’s bonkers economics but also an anagram of his own name. No, seriously.

    So, who’s surprised to read the Navarro tariff calculations are the work of a ChatGPT output which the right-leaning American Enterprise Institute (AEI) think could be out by a factor of four times(400%)? It’s a bit late now but Musk has just described Navarro as “dumber than a sack of bricks” and “truly a moron”.  You’ll note my view that Musk is too late to undo the damage of the Mad Orange King and the Ron Vara school of economics. In fact, it’s not actually my view.  Policy uncertainty paralyses business activity and the scores are coming in fast….

     

    *Larry Fink, CEO of the largest asset manager on the planet, BlackRock Inc, with $10 trillion reasons to care says “Most CEOs I talk to would say we are probably in a recession right now.”

    *Jamie Dimon, CEO of the most valuable bank on the planet, JP Morgan, in his annual letter to shareholders delivered a blunt warning – “The recent tariffs will likely increase inflation and are causing many to consider a greater probability of a recession.”

    *Airline share prices are traditionally viewed as early warning signals of trouble ahead. So, when you see Delta, American and United stocks drop 35-45% this year we should pay attention. Larry Fink is anyway – “Airlines and air traffic are a canary in the coal mine. Right now the canary is sick”

     

    Cheery stuff. However, these are US-focused observations. We have been here before and we should remind ourselves that capital markets can be quite effective in taming policy tyranny. Ask Liz Truss. Then check bond markets. Interestingly, if bond markets “believed” recession was imminent then bond yields(rates) would not be rising like they are right now. US 10 year Treasury yields have jumped from 3.87% to 4.52% in the past two trading sessions. This is highly unusual bond behaviour when equity markets are so volatile or declining. In fact, it’s the all-powerful bond market questioning the credibility of US institutions. Hence, you’ll soon be hearing Trump whining about the Fed lowering interest rates but, again, not quite understanding bond markets. Other markets are behaving in a more orthodox manner but could also upset the tariff toddler.

    You might have noticed that Trump has refused the pre-‘Liberation Day’ EU offer of zero tariffs on industrial goods. Trump and his team are now switching focus to “non-tariff trade barriers” and demanding the EU buy $350 billion of energy to balance out trade deficits. The White House is rapidly losing the faith of its fossil-fuel friends who are staring down the barrel of $50 spot prices for oil. Ahead of inauguration, the reversal of Biden’s signature IRA act and decarbonisation/cleantech investment incentives sounded good to the oil barons but they didn’t plan on Trumpolini playing Texas Hold ‘Em with every trading partner in the world …..at the same time. And, don’t forget the Kremlin and its war economy is acutely oil price sensitive too.

    Cryptocurrencies and their broligarch fan boys are also going to be a bit tetchy apart from “car assembler” Musk. Bitcoin is down 17% year-to-date with cryptocurrency ETFs (funds) suffering their third consecutive month of outflows. In fact, the big picture worry for all cryptocurrency evangelists is that on current pricing history evidence Bitcoin appears to have morphed into a tracking instrument for the tech-heavy Nasdaq equity index. It’s supposed to be a currency, as a quick reminder.  Go check the charts and then wonder how long before the broligarchs put pressure on Trump to move the markets into risk-on crypto-friendly mode. We will wait but private markets won’t stand still. In fact, big global structural themes (outside trade) will continue to play out in private. Just this week we spotted these three deals amid all the screaming red ticker-chyrons and panic headlines:

     

    • Faster research: San Francisco-based Rescale provides AI-powered R&D simulation software and has raised $115m from investors including Nvidia.
    • Content generation: Another Californian start-up with Spanish founders, Krea, uses generative AI for image content generation and design. They have just raised $83m from investors including Bain Capital.
    • Payment infrastructure: Juspay, an Indian payment infrastructure start-up has raised $60m from institutions including Kedaara Capital.

     

    Humanity and innovation will keep moving forward irrespective of the headlines. Public markets gyrating violently are the real-time expression of capital flows, fears and policy paralysis but, in private, both in Washington and in private markets we can be far more optimistic. Nothing crystal clear right now but the waters will still be blue ahead…

  • What Signals Are You Watching?

    What Signals Are You Watching?

    I’m a bit lost. I can still remember as a child staring out at the Ballycotton Lighthouse as it guided battered yachts to safety during the Fastnet Race disaster of 1979. Fast forward to today and there’s another potentially calamitous “storm” brewing for the most basic concepts of accepted facts and truth. Worryingly, there’s increasing evidence that the “lighthouse” of global leadership on rules of law and common values has gone dark. Orwellian dark. I know we’ve been here before with White House Press Secretary, Sean Spicer, and bonkers claims of inauguration crowds for Trump 1.0 but the second coming of Trump is a whole new level of autocratic demands to “reject the evidence of your eyes or ears.” That’s Orwell, not the White House.

    It would appear that “their final, most essential command” this week is to NOT read the time-stamped texts of the US Secretary of Defense on the unsecured Signal mobile chat app shared with 16 other US security chiefs (plus one mistakenly added journalist) and conclude that this was the most embarrassing and dangerous self-inflicted security failure by US institutions in decades. The cover-up and spin-fest since the Atlantic magazine scoop has witnessed equally incompetent and criminal attempts to parse the meaning of “war plans” and “attack plans”. To be clear, the key “ground truth” in this intelligence near-miss is that advance information on a military mission puts US military personnel in danger. But here we are.

    Donald Trump has given a press briefing stating the US “has to have Greenland” and his Kremlin keeper, Vladimir Putin,  is dovetailing on message beautifully by saying “Trump’s plan to seize Greenland is serious”. Doesn’t that sound like two mob bosses agreeing ‘territory’?  Yes, but don’t ask the lawyers. Leading law firm, Skadden Arps, has just “agreed” to provide $100m of pro-bono work for initiatives supported by the White House in order to avoid adverse targeting by a regime irked by previous “woke” cases taken by Skadden.  So, do we all surrender as democracy dies in darkness? Well, there are other Signals to watch with possibly more impact than a Houthi-Yemen air strike mission. In fact, their potential impact could be sufficiently influential to trigger “lighthouse” leadership, even change.  I’m looking at three Signals in particular.

    First, as we head towards the Trump self-styled “Liberation Day” of trade tariffs imposed globally, we watch the money or flow of same. Some might think the enormous switch by investment institutions out of US equities (down 5% year to date) to international equities (eg. German Dax up 15% year to date) is a big deal. It is. But, equity markets could be due a “rotation” anyway after 15 years of US dominance and, frankly, more challenging valuations when economic leadership veers into cult lunacy territory. The awkward fact for the Trump crime gang is that foreigners own $16 trillion of US stocks and they are selling them even quicker than Tesla shares. However, the bigger more worrying signal is in the debt (or credit) markets. As we regularly say, debt(bond) markets can really intimidate as they can cause proper global economic damage. So, when I look  at the ‘plumbing’ of the financial system and corporate debt (credit) data, I’m seeing signs of cracking and stress. The jargon monoxide will involve terms like “spreads”, “VIX”, “call options” and “default pricing” but, take it from me, this is where the intimidation of the Trump White House is beginning.

    Second, how long will Trump’s ‘broligarchs’ go along with his trade war when there is possibly a far more consequential technology “war” exploding across our screens every day? My sense is that there could be a calculation that trade wars are a dangerous commercial distraction. Check out the latest data from Stripe. Software companies (SaaS) were always the uber-growth leaders, with Stripe analysis showing the median time for the top 100 software/SaaS start-up companies to reach $5m of recurring revenues was 37 months(data from 2018). But, there’s a new growth monster in town. Stripe data (2024) shows the top 100 AI start-ups hitting that $5m milestone in….. 24 months. You might have read that executive suites across the USA have been paralysed by indecision due to erratic Trump economic policy. Indeed, M&A deal activity has fallen to the lowest in a decade and year-to-date is down a whopping 30% on last year. However, the story in start-up world is very different. In the first quarter (Q1) of 2024 there were two start-ups acquired for more than $1 billion (unicorn status). In Q1 this year, there have been ELEVEN $1 billion plus start-up acquisitions. In fact , the total value of these deals this year has been more than $54 billion or 10x the activity value of Q1 2024. It’s all driven by AI and cloud infrastructure(including Google’s largest ever deal with Wiz) but when you see the latest text-to-image generation of OpenAI and the “Ghibli” craze you’ll definitely feel something’s up. But not the Tesla share price…

    Finally, and Elon Musk might think I’m being “mean” (while he cuts social security support for the elderly) but Tesla’s share price is worth watching. The DOGE whisperer in the Oval office says he’s leaving government ‘service’ at the end of May. However, for Tesla and its shareholders, post its $800 billion share price meltdown, the value destruction pain may not end in May. The brand damage of embracing right-wing extremism has been staggering to witness but the end-game could be no less dramatic. The recent deal to sell X/Twitter to xAI (this x stuff is tiresome isn’t it) has been seen as a way for Musk to avoid margin (debt) calls on Tesla shares he has pledged as security on cross-company loans. The trigger for those margin calls was reportedly a Tesla share price of $120 per share (vs today $263 per share) but I’m not sure the pain point has been removed. The market value of Tesla is still more than $800 billion compared to Ford at less than $40 billion. Let’s not forget it’s a car company where a balance sheet and cash flow can implode if sales/revenues go into reverse. Last year revenues had a small 1% decline… but this year? Watch revenues closely, and watch Musk.

    This might seem like a random set of signals to watch but sadly, there’s one emerging truth re US leadership. Money talks, not values nor principles. The Japanese (Nikkei) stock market has kicked off the week with a 4% wipe-out and we can only wonder when the men with the money (and the loans) pay a visit to the White House. We might have to wait a bit, but I’m hopeful the money will find that “lighthouse” moment.

  • Three Pictures Of Opportunity From A Changing World Order

    Three Pictures Of Opportunity From A Changing World Order

    It is difficult to avoid pictures of the St Patrick’s Day sex-pest parade at the White House but I can assure you it is well worth the effort. Clearly, the rule of law and the world order is enduring a seismic shakedown but it would be a mistake to assume all is lost. Hidden behind the disbelieving headlines and festive mug-shots there are a number of alternative pictures really worth thinking about. Hedge fund billionaire, Ray Dalio, wrote The Changing World Order: Why Nations Succeed and Fail  as recently as 2021 and used five centuries of history to show how nation success depends on cycles much like business. So, I have been struck by three investment trends whose emergence could be attributed to these long-run cycle shifts. The first cycle journey actually starts with cars…..

     

    The mighty Volkswagen AG (VW) of Wolfsburg was founded in 1937 in the midst of another seismic geopolitical shift and 80 years later in 2017 became the world’s largest automotive manufacturer by global sales. In 2021 VW reached its peak market value of €155 billion but the Ukraine war, rocketing energy prices and electric vehicle (EV) competition has wiped almost €100 billion from that valuation since then. In fact, this week the even-older arms and military vehicle manufacturer, Rheinmetall AG, surpassed VW in market value. In reality this is a 10-year story rather than a 135-year history. As recently as 2014, Rheinmetall’s 125-years of manufacturing ammunition, missiles and military transport vehicles had built a total franchise value of just €1.3 billion. The invasion of Crimea by Russia in the same year was the “butterfly wing flap” moment as the company’s valuation over the following 10 years increased exponentially to deliver a 48x return to any far-sighted Kremlin watching investors. The picture below is a graphic reminder of the defence sector resurgence opportunity and the industrial shift away from the internal combustion engine (ICE):

     

     

     

    Of course, Germany is not the only country impacted by geopolitical change. Plenty of Trump apologist commentators seem to believe “Agent Orange” is playing 4D chess and seeking an alliance with Putin to take on the growing threat of China. Well, how’s that going? About as well as Trump’s ‘day one’ defeat of inflation or the $5 trillion evaporation of the US stock markets driven by a tech-heavy “Magnificent 7” meltdown. In contrast to US investors, the Chinese are enjoying a 40% rise year-to-date for their tech sector stocks and a healthy almost-20% gain for the broader Hang Seng Index. Ironically, it’s a Chinese AI company called Butterfly Effect which is creating possibly even greater waves than the DeepSeek cost ‘shock” back in January. Butterfly’s AI digital assistant, Manus, is more powerful than DeepSeek and has automated up to 50 tasks from buying a property in New York to editing a podcast. There have also been big Chinese breakthroughs in recent weeks in quantum computing and robotics adding to a stark picture below (Source: Bloomberg) – a whopping 40% outperformance by the Chinese tech sector over the US tech sector since Trump took office in January.

     

     

     

     

    If it feels like US Big Tech is in relative retreat then the latest data from VC research house, Pitchbook, makes for interesting reading. Big Tech is playing a less prominent role in the US start-up M&A market due to regulatory pressures but big corporates seem to have been replaced by start-ups themselves as acquirors. More specifically, in 2024 more than one third of start-up acquisitions were made by VC-backed start-ups. This highlights the emergence of a new buyer profile and exit route for start-ups; VC-backed ‘unicorns’ with significant cash reserves and an appetite for growth. Indeed, Pitchbook analysts put this rather well:

     

    “Amid the trend toward ‘profitability’, it is important to remember that growth remains essential and serves as a key motivating factor for these buyers…..The high number of VC-backed companies also creates numerous opportunities for consolidation. While acquisitions by VC-backed companies may not often dominate the headlines, they are becoming an important aspect of the venture capital liquidity narrative. ”

     

    The chart below (Source: Pitchbook) shows start-ups accounting for just 20% of M&A by value as recently as 2018. So, the move above 33% today seems significant…

     

     

     

    In summary, the pictures above should be viewed as opportunities happening in real time while we are distracted by tawdry turmoil and photo-ops in Washington. More importantly, we should start to think about geopolitics as the driver of not just nation cycles, but also business cycles and new long-run structural trends.

     

  • Ten MEGA Signs Of Not So Much Winning…

    Ten MEGA Signs Of Not So Much Winning…

    Never thought I’d say this. I think I need those Freezbrury cold water challenge days to extend into March. Well, I need some shock therapy to dull the senses and distract from a rules-based world order which is crumbling by the hour. Should I care that a former Fox & Friends host has just instructed the US military to cease all operations against Russian cyber threats? Probably, but I’m not sure it’s helpful to follow the dizzying pace of breaking news and broken alliances. We have previously written about how the financial markets can rein in autocratic megalomania both East and West. In that instance we flagged the power of bond (debt) markets. Now, it looks like a regime which promised “so much winning” is losing the confidence of more than the bond market. Here’s a list of losers….

     

    US Business Confidence: The silence or craven submission of US business leaders to the erratic ‘shake down’ of US allies and the established world order has been stunning to observe. However, as we often write, corporate actions can be more informative. Quietly removing DEI policies requires minimal leadership courage (I’m being very generous with that word). Dealmaking (M&A) on the other hand is way up there in terms of career risk for senior executives. Guess what? US M&A deal activity in January slumped to a decade low with a 30% drop year-on-year.  Uncertainty is a strategic decision killer.

    US Capital Markets: The US financial markets have dominated the world since the 2008-2009 financial crisis. US stock markets now account for more than 50% of the value of global equities after outperforming international stocks for more than 16 years. However, this year it’s a different or shifting story. At the end of February, international stocks had gained 7.3% in 2025 vs a 1.4% gain for the S&P 500.

    US Growth: Investors in US stocks appear to be concerned. They are not alone. The much-watched GDPNow forecast of the Atlanta Fed is currently projecting US GDP will CONTRACT by 1.5% in the first quarter compared to the forecast of healthy 2.3% growth a week earlier. Also, US consumer spending has just fallen for the first time in two years.

    US Technology: The “broligarchs” might have taken over the White House but the “Magnificent 7” technology stocks are experiencing slippage in 2025. Only one of Meta(+11%), Apple (-4%), Amazon (-3%), Google (-10%), Microsoft (-6%), Nvidia (-10%) or Tesla has seen its share price in positive territory this year.

    Tesla: Tesla’s share price decline this year is a whopping 23%. Apparently, Elmo Musk’s fondness for autocrats and far-right parties in Europe has been a bit of a brand-killer. Sales in Europe for the first two months of 2025 are down 46% which can’t all be explained by consumers waiting for a Model Y refresh. Don’t expect any bravery from Tesla board directors either.

    US House Sales: US existing home sales have dropped to the lowest levels since…. 1995. Yes, that’s when there were 80 million fewer people living in the US and didn’t have a President threatening a tariff war with its neighbour and construction-critical timber supplier, Canada.

    US Dollar: As the world’s reserve currency the US Dollar (USD) is a long way away from any structural impact from the waning credibility of its sovereign’s political system. However, the USD is trading at an 11-week low against 6 major rival currencies. And….one of the better macro writers out there, Barry Ritholtz of The Big Picture blog, has flagged the dangers of policy error for the USD:

     

    “Since the end of World War Two, the USD has been America’s “exorbitant privilege” as the world’s reserve currency. However, several factors threaten this privilege: wide-scale tariffs, the embrace of alternative digital currencies, the breaking of long-standing alliances, and dallying with dictators.

    Since the end of World War II in 1945, the rise of the United States as the world’s dominant economic, military, and cultural power has led to a relatively peaceful 75 years in the Western Hemisphere, Pax Americana, has greatly benefited the U.S. and its allies. Putting that at risk would be one of history’s greatest unforced errors.”

     

    US Supply Chain: The just released ISM Manufacturing survey for the US reveals the “prices paid” index for companies surged to a 32-month high as suppliers adjusted prices upwards ahead of threatened Trump tariffs. Oh, and don’t mention egg prices to the ‘Build-that-Wall’ cult – egg shortages are pushing prices up by 53% vs 2024 prices. Yep, you might remember there was some bloviating chat about inflation being fixed ‘on day one’.

    US Jobs: There’s every chance Elmo Musk could end up being the DOGE that caught the car. Musk has been tasked/appointed himself to remove unnecessary spending by the US Federal government and its 3 million employees. But… the shock being applied to the US economy is possibly underestimated. The US government spent $6.8 trillion in 2024. For context, that’s more than 10x the size of the global semiconductor industry’s annual revenues ($628 billion 2024). Firing people in climate/weather forecasting roles and shutting down foreign aid (USAID) are just headlines. The bigger picture suggests one of the US economy’s most critical components (government spend) is in contractionary territory which will impact not just government jobs but the entire government supply chain in the private sector. Yep, a $7 trillion customer of the US economy is now being  run by Elmo and his “Muskrats” with cute names like “Big Balls” and “First Buddy”. No seriously.

    Brand America: As a symbol of American global reach and brand value it’s difficult to beat McDonald’s. Some of you may even recall the opening of its first Moscow restaurant with the famed “Golden Arches” in January 1990. You just knew the geopolitical sands were shifting. Less than two years later the Soviet Union collapsed. Now, check out the IPO of a company in Hong Kong this week. McDonalds is no longer the biggest food and beverage chain in the world. That title now goes to Mixue Ice Cream & Tea which has 45,000 branches in Asia and is opening approximately 21 stores……. every single day.

    It’s a bit early to be suggesting a shift in global leadership but perhaps the competition has just shot itself in the foot. I’m thinking of Europe now and how a geopolitical crisis might just prompt real thought about making Europe great again (MEGA). Three financial data points caught the eye this week and suggested investors might be warming up to real policy action in Europe:

     

    • The Swedish Krona is appreciating fast (2.4% today) as investors recognise Sweden has the highest military equipment production per GDP in Europe.

     

    • Europe’s benchmark stock index, the Stoxx 600, has risen every week for 10 straight weeks.

     

    • Germany’s Rheinmetal (+14%), Britain’s Bae Systems (+19%) and France’s Thales (+23%) have seen their share prices rise by double-digit percentages in a matter of days.

     

    The $2.5 trillion global defence industry won’t be the only area Europe should target to compete as a “trusted partner” . Presumably, many countries and organisations seeking commercial partners in healthcare (medicine/vaccines) and financial services will have noted the risks of deal exposure to a US political leadership who ultimately might want  a “piece” of a country in exchange for “peace”.  Europe, by standing with Ukraine, could send a very powerful message on dependability to future partners as its former Washington ally works furiously to keep the KGB lieutenant colonel in the Kremlin happy.

     

  • You’re Watching The Wrong Dictator Reality Show..

    You’re Watching The Wrong Dictator Reality Show..

    It deserves an expletive. It’s exhausting. Magic water spigots turned on in Northern California, summary dismissal of Inspectors General watchdogs and sending uninvited military planes into the airspace of your closest Latin American ally. Of course, it could be worse as an ally – you could just be asked over an introductory phone call to give up over 95% of your sovereign territory. Perhaps, there will be a Eurovision-style poll run by Fox News to decide the future of Denmark and Greenland. I can almost see it now… say hello to the voting panel in Belgrade, or Moldova…. or Transnistria. More expletives. But, no. This week we were given a trillion dollar reminder that we are watching the wrong dictator reality show.

    The trillion dollar damage to tech stock valuations inflicted by China’s unveiling of a super-cheap AI large language model, DeepSeek (with similar performance powers to ChatGPT, Gemini etc) was indeed a “wake up call” for US Big Tech according to President Trump. However, at the same time, the geopolitical machinations of China are veering into reality show territory. Thanks to the erosion of truth in the world there’s no need for James Bond-style subterfuge. Instead, it can be as brazen as hell. Chinese ships have been damaging undersea cables around Taiwan in recent months but this week marked the third severing of an undersea cable in three months…. in the Baltic Sea. The fibre-optic cable in the latest incident connected Sweden and Latvia but this time involved a China-owned ship in the sabotage operation. It would seem that Russia, as China’s “mineral colony”, has invited China to assist in infrastructure “grey-zone” conflict. Indeed, China has its own domestic reasons to ratchet up the geopolitical temperatures of distraction.

    The latest economic activity data from China is looking pretty grim. January manufacturing activity actually contracted which won’t put the cheer into the upcoming New Year celebrations for 1.4 billion Chinese. This manufacturing slowdown has surprised many given recent monetary stimulus initiatives by the Beijing regime. However, we can expect further stimulus measures given Chinese government debt/GDP ratios are closer to 60% compared to US and European governments labouring under debt burdens over the 100% mark already. This monetary firepower will have knock-on effects across international markets and global economic growth. But… there is a strategic price to be paid by the rest of the world. And, it’s not just the obvious trade deficits. DeepSeek is more likely to be a temporary shock and, despite the hysterical headlines, the emergence of a better engineered cheaper way to harness computing power is a net benefit to all, including broader equity markets. However, DeepSeek highlights the growing excellence of China across multiple technologies.

    According to a 2024 study by the Australian Strategic policy Institute (ASPI), China now dominates the US in 57 of 64 critical technologies, up from just three in 2007. The US, which led in 60 sectors in 2007, now leads in just seven. Rankings by the ASPI were based on cumulative innovative and high-impact research and patents. ASPI credits President Xi Jinping’s ‘Made in China 2025’ plan for the infusion of “massive direct state funding for R&D in key technology,” stating that existing strategic investments turned into a plan to achieve technological “supremacy”. The areas where China excels include…

     

    • advanced integrated circuit design and fabrication
    • high-specification machining processes
    • advanced aircraft engines
    • drones, swarming and collaborative robots
    • electric batteries
    • photovoltaics
    • advanced radiofrequency communication

     

    Oh, and did we mention nuclear fusion? Of course, you might have missed this if you’d been watching the fantasy Greenland invasion on the other show. In the past week, Chinese scientists broke the nuclear fusion record for sustained plasma at over 100 million degrees by maintaining a mix of electrons and ions in a fluid state for more than 1,000 seconds. As a reminder, nuclear fusion replicates the sun’s energy, offering limitless, carbon-free energy.

    So, if you were a White House strategist you might want to curtail China’s technology advances. And, this is where things have taken a very strange turn. The Trump campaign has made lots of noise about China with tariffs being the chosen commercial weapon to rebalance US trade deficits with the Middle Kingdom. Fast forward to today and tariffs were, instead, the chosen weapon to bully Colombia. But… the US actually has a trade surplus with Colombia. More strange has been the Trump reverse-ferret on TikTok which he’d now like to see continue operating in the US (rather than enforce the ban upheld by the Supreme Court) with a US investor partner like Elon Musk or Larry Ellison. That all make sense? Now, for the really weird stuff.

    Remember when Taiwan was supposed to be protected by its US ally from the increasing threat of China? Well, while we’ve all been distracted on DeepSeek news, there were some fairly seismic developments in US-Taiwan trade relations. Check out this headline about the two ‘allies’….

     

    Trump’s 100% tariff threat on Taiwan chips raises cost, supply chain fears  –  Business Insider

     

    So much for the tough talk on China. Beijing must be thrilled and President Xi will be encouraged to keep up the ‘grey zone’ infrastructure sabotage in the Baltic Sea and Straits of Taiwan. Meanwhile, the new US Defense Secretary , Pete Hegseth, fresh off the Fox & Friends chat sofa, has got to work defending the nation. First priorities….. revoking former chair of the Joint Chiefs of Staff, General Mark Milley’s security detail, removing all portraits of the general in the Pentagon and pursuing his demotion.

    Anyone get the feeling the wrong ‘enemy’ is being pursued…..?

     

  • Trump Words Scare But Bonds Are The Real Bully Boys

    Trump Words Scare But Bonds Are The Real Bully Boys

    The flashbacks are coming on strong. Who thought myself and Donald Trump would be ratified for new office in the same week? Not me. Anyway, enough about me… said the Donald never. Seriously, do we really have another four years of these whining streams of consciousness, aka press conferences. As Los Angeles burns and Gaza starves, the world is still digesting The Accused’s quasi-declaration of war on Panama, Mexico, Canada and…… Denmark. Clearly, the Orange Toddler is emboldened, as Putin’s number one fan boy, to threaten the invasion of both Panama and Greenland for “national security” reasons. One could be dismissive of these attention-seeking words of intimidation but this feels different, and probably Putin derived. Hamlet this is not, but Act I of this tragedy was Ukraine. Who knows what Act II could be in a new world order of misinformation, security over-reach and sovereign destruction?  Taiwan would top most risk lists. However, Estonia or Finland might disagree, as the Baltic plays host to “infra-destructure” warfare. I might disagree too. There’s a bigger bully boy out there and possibly a reason for hope.

    We have written many times before about the perils of depending on “other people’s money”. In most cases, the most catastrophic financial implosions have involved high levels of debt or leverage. However, in certain cases catastrophe has been avoided. The phrase “my word is my bond” speaks to credibility but I’m thinking of a more threatening type of bond today. Recall the famous words of Clinton White House strategist, James Carville….

     

    “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

     

    Liz Truss might attest to that intimidatory power. Her lettuce-life UK premiership was ended by the UK government debt markets (Gilts) going into freefall after her mini-budget ignored all rational advance warnings and almost blew up the UK pension fund system. The Bank of England saved pension funds with a swift monetary/funding intervention but there was no saving Chancellor Kwasi Kwarteng or his delusional prime minister. Fast forward to 2025, and bond markets for me are the big start-of-year story. And, it’s not looking good for the UK….again. In fact, things have deteriorated since the Truss budget debacle. It appears that an election pitch along the lines of “the other lot are awful, vote for us” is failing to convince the all-powerful debt markets that the new government of Sir Keir Starmer has any credible grip on the economy. Try these bond market data points for starters…

     

    UK government long-term borrowing costs – priced in the 30-year Gilt/bond markets) – are at their highest levels since…. 1998.

     

    UK government medium-term borrowing costs – priced in the 10-year Gilt markets – are at their highest since 2008.

     

    In real terms, this means that the UK government is going to spend more on interest costs than on national education this year. Meanwhile, the politics of the country is consumed by “grooming gang” criminality which has been widely known about since at least 2015 (Jay Report). Oh, and UK Treasury Minister, Darren Jones, has just soothed House of Commons members’ fears saying “it is normal for the price of gilts to fluctuate”. Fluctuate? I can think of other “F” words being used on City financial trading floors right now. However, the ‘reality bite’ of bond markets might not be confined to the UK.

    The US government has been racking up monster debts too – just the $34 trillion at the last count. So, for those believing Trump is either going to buy Greenland for trillions of dollars or spend similar amounts on military invasions of US allies (I know, genius stuff), there’s a tiny bond detail which merits some attention. At this week’s US government monthly auction of 10-year bonds/debt instruments traders pushed the yields/costs to be paid by the US government to an 18-year high of 4.68%. It might not look like a particularly big cost but this is the foundation of all pricing in the US house mortgage and car finance markets. So, if the bond markets are threatening mortgage or car financing costs to rise to levels not seen in almost two decades, then be assured that the bond bully boy will trump the fantasy words of Agent Orange. This is an example of debt markets warning about spending inflation and unsustainable government budget deficits. But, there’s another type of warning which the bond markets can deliver.

    Ultra-low interest rates(bond yields) can also point to multi-year stagnation caused by a national (including government) debt crisis. Japan is the classic multi-decade example of minimal GDP growth or inflation and super-low interest rates. But, there’s a new contender for zombie debt stagnation: China. The Middle Kingdom’s $11 trillion government debt market is sending some very strong signals. The gap in costs/yields between the US and Chinese government bond markets is the highest in history. Chinese 10-year bonds are yielding just 1.6%, but the bigger story is in the long-term 30-year bond markets. Japanese 30-year bond yields are now higher than China’s which starkly signals a “Japanification” of the Chinese economy. The credibility of China’s economy is at stake but critically that of President Xi too. Interestingly, Xi’s new nickname on the Chinese internet is “the elementary school student”. Of course, an invasion of Taiwan could distract the Chinese population but there’s also a real possibility bond markets could signal Xi being toppled from power.

    As a final thought and one recently raised by David McWilliams in an excellent podcast there could also be a reality check around the tariff threats of the incoming Trump administration. Maybe it’s not quite as bad as invading your allies, but imposing tariffs on your biggest trading partners could prompt a painful bond bite-back. McWilliams makes the very good point that the Chinese and Japanese own/hold trillions of US government bonds. If these trading counterparties sell them as part of a bigger trade tariff war then US government interest costs and US consumer finance costs will painfully spike. US government interest costs already exceed $1 trillion annually which, if it were a standalone government department, would actually outspend the US Defense Department’s annual budget. My money is on financial pragmatism watering down most of the actual tariff outcomes. In fact, another part of the financial world is hinting at Trump threats not quite happening in a different market. Despite the threats to roll back cleantech and renewable initiatives of the Biden administration, it would seem the markets are not quite convinced. Indeed the latest data from Wall Street might surprise; apparently the share price performances of clean energy stocks and fossil fuel  stocks are in a statistical dead heat since Election Day (Source: Callaway Climate Insights).

    Perhaps there’s a new lesson soon to be learned in geopolitics….

    Your words are only as strong as your bonds.

     

  • Silver Linings For Finishing 2nd Almost Everywhere…

    Silver Linings For Finishing 2nd Almost Everywhere…

    I blame the Irish. Should have seen it coming. Poor immigrants once upon a time, the changed perspectives were there for all to see. A couple of Kellys, a Mulvaney, a Spicer, a McMahon and a McGahn, all key lieutenants in the Trump 1.0 cabinet of 2017, championed Muslim bans, Mexican walls and family separations. I’m being flippant and skipping through a few decades of political evolution here but political integration of immigrant communities is a good thing. Take it as a genuine US presidential election positive. Of course, there will be plenty of Democratic Party navel-gazing and gnashing of teeth in the days and years ahead, but finishing second for the first time in 20 years (last popular vote loss was 2004) will focus minds on the stunning shift of ethnic minority voters to an anti-immigrant Trump ticket.

    Things looked bad for the Harris campaign very early on Tuesday evening. Hispanic-heavy Miami-Dade County in Florida had given Hilary Clinton a 30 point winning margin in 2016. On election day, Trump obliterated that by 40 points to secure a 10 point winning margin. There were other shockers – Star County (Texas and 97% Hispanic), Suffolk County (New York) and my personal favourite, Anson County in North Carolina. Republicans have won this 45% black county only once before since…. 1870. Wowzers. The purpose of this article is not to follow most post-mortem commentary and examine where the Democrat messaging didn’t connect but rather to highlight some potentially positive developments. If anything, the change in the mix of the Republican vote is more interesting. Try the dilution of white voting power.  The ‘dilution’ phrasing might surprise readers’ perceptions of what constitutes the Republican party base vote, but the scores are in:

     

    *Trump won less of the white vote this year (55%) than 2020 or 2016. And…

     

    *Harris (43%) did better with the white vote than Hilary Clinton or Joe Biden.

     

    *Hispanic men voted for Trump 54% vs 44% for Harris.

     

    The always excellent Noah Smith in his newsletter recalled a former Irish Republican, Ronald Reagan, saying that Latinos would eventually become Republicans. The social negatives attached to that shift are for another day but Smith highlights an even more important point for a polarised US society:

     

    “This largely destroys the narrative that non-white immigration will demographically drown White Americans under a tide of imported minority votes….. At some point, Republicans are going to realize this, and hopefully become less anxious about America’s racial future. Hopefully they will also realize that any attempt to make voting harder actually hurts them in the future, because the impact would fall disproportionately on their own base”.

     

    Oooooh Tucker Carlson might not like that narrative challenge to the “Great Replacement Theory”. But, there’s also another positive attached to this stunning shift in voting patterns. Harris lost so emphatically and so early that there was no dispute over electoral process. In fact, Trump improved his vote in 90% of all counties in the USA, and that includes Guam flipping to red. For those who hoped for decency, that feels like finishing 2nd just about everywhere. Many wanted democracy to prevail. It did, but with the anticipation that the “right” side probably had to win for a smooth transition, right? That caveat is for another day’s discussion too.

    Also, while we are on the topic of ‘right’, another stunner for me was that the white evangelical vote was 22% of the total vote and they voted 81-17 for Trump. Other voters who make up the remaining 78% of the electorate voted overwhelmingly for Harris by a 19 point margin (58-39). So, without white evangelicals Harris would have won the election by 20 points!  Let’s hope God is right……

    Meanwhile, for the socially agnostic financial markets, uncertainty is a wealth destroyer, paralyses decisions and kills investment activity. So, not surprisingly, there have been a few financial wins in the early days after the election. We’d highlight the following:

     

    *Banking and asset management stocks like Goldman Sachs, Blackstone, Blackrock, JP Morgan and Apollo all flew up by 10% or more.

     

    *The S&P 500 had its best day in 2 years and best ever post-election bump (+2.5%).

     

    *Elon Musk’s Tesla jumped 15%

     

    *Bitcoin’s price rise by 9% to $75,000.

     

    The Musk win is probably a struggle for some but the EV revolution is climate critical and hopefully keeps Trump tangentially on board with decarbonisation of the economy. Intriguingly, the presence of Musk as chief Trump mascot could bring a slightly contrary positive. There are some, including me, not comfortable with the billionaire “broligarchs” brazenly pushing their own commercial agendas. However, it would be a mistake to conclude that it is only the Republican party engaging billionaire promoters. The Democrats had their own, possibly glitzier line up of billionaires, influencers and celebs. And, the big strategic mistake would be to react to a Jaws-like electoral savaging by suggesting “we need a bigger boat” or better billionaires. That boat has sailed. The positive lesson from this would be to “listen” and start exerting proactive power.

    One of the critical shifts in voting patterns was urban voting. Democrats still won the big cities but the winning margins were embarrassingly small compared to double-digit history. Urban voters in the likes of New Jersey, New York, Chicago, San Francisco and Detroit have witnessed a disgraceful decline in the condition of their cities. And, other urban voters have noticed. Where Democrats have governing power, they need to deliver better city living. Security, mental healthcare, housing, crime and infrastructure are very real challenges experienced, in particular, by the lower middle and working classes. Investment and solutions to these challenges will improve urban lives and win votes.

    Commentators recently described the US voter base as one now split evenly across three cohorts: i) white college-educated, ii) white non-college educated and iii) everybody non-white. Currently, the Republican party is connecting more effectively and adding voters with two of those three. The Democratic Party should be surprised and concerned about the only one with which they are growing/connecting. The good news is that the key driver of political power in today’s America is not ideology or race. The winning factor is DELIVERY, perceived or promised. Clearly, social growth and stability are important for a nation but there’s a price for everything. In this instance, the price (inflation) – and a perception of social agenda prioritisation – was too high. Just ask Latinos, now known as “Latinx” in Democratic Party literature.

    For investors, less financial regulation, lower technology oversight(AI) and more deals (M&A, IPOs) all promise more exits and further investment cycles. All good news, until it’s not. Note, only 15 years ago the world paid a shattering economic price for deregulation of financial credit markets. Go back another two decades, and here’s a final thought for the autocracy delivery (over democracy) fans out there celebrating technology and commercial freedom…….

    The last global authoritarian empire to implode was tipped into collapse by lies and a catastrophic failure of technology .

     

    “Every lie we tell incurs a debt to the truth. Sooner or later, that debt is paid”

     

    – Valery Legasov, chief of the Chernobyl disaster investigative commission.