Market Musings 090623: Economic Pessmism V Market Optimism

10th Jun '23 by Edmund Shing

14 comments 1448 reads

Market Musings 090623: Economic Pessmism v Market Optimism

Stock markets climb the wall of worry

Monthly Vox Markets Macro Video (with Paul Hill)

Macro Investing Masterclass with Chris Watling & Edmund Shing

Weekly Podcast

Everything you need to know about the Nasdaq’s performance year-to-date

Drivers of the stellar performance of the Nasdaq 100 this year
Can the trend continue?
What smart investors should be doing right now

Summary

Plenty of reasons to be pessimistic
But stock markets seem to contradict this, reaching new highs
Focus on mid-/small-cap stock now - confirm large-cap momentum or not?
Economic concerns now in Europe
But inflation is coming down, probably to come down faster
Sectors/Themes: Global semiconductors, Circular Economy

Contrasting Perception and Reality

As is quite frequently the case, the outlook for the global economy looks somewhat grim. Bad news abounds:

The ongoing Ukraine conflict is the biggest war in Europe since WW2;
Inflation rates have reached multi-decade highs over the last few months, squeezing households;
Central banks in US and Europe have been forced to aggressively raise interest rates over the last year, causing problems for both corporate and household borrowers as mortgages and loans become much more expensive;
US regional banks remain very stressed due to deposit flight, driving lower availability of loans to companies and households;
Commercial Real Estate markets are suffering given more expensive financing rates, and with office building demand under pressure from the Work From Home trend;

Global recession has been expected for some time now. In particular, the US Leading Economic Indicator points clearly to impending recession.

-UNvG_DbuWjgMcvhlR3Ggb7FnUDZSwb11-ESchW_Jo7Ar4OgF8pKm51QB4ifj5Q4nJFGlNTHOmKCk6-DoNWrkf88qHAf-2oC0PDaZRny0zercoRWg-YJX_zYaKnjZYZSKE_d0JUJ6HnWKOW0SSEzJKc

Source: Conference Board

Inflation rates in the developed world remain higher than is comfortable for central banks, even after central banks have raised interest rates quite aggressively over the last 12 months or so to levels not seen in 15+ years.

But stock markets reflect optimism?

And yet, despite this barrage of pessimistic news flow, stock markets around the world seem to tell a different story.

A number of stock markets around the world have hit multi year highs including the Japanese Nikkei 225, the French CAC 40, the German DAX and even now the…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Breaking the laws of economics

Musk has repeatedly said that Tesla's fate is tied to its driver-assistance features, and during the CNBC interview, he yet again repeated claims that Teslas would become appreciating assets, roaming the streets night and day earning money—split between Tesla and the car's owner—as robotaxis.

"Well, the utility of a car, typically a passenger car, is going to be maybe 10, 10 hours a week, maybe 12. If you say like somebody's going to drive an hour and a half a day, on average, so maybe an hour commute per day and then an occasional long trip but figure it's like 10, 12 hours a week is typical for a passenger vehicle. And then you also have a lot of costs associated with parking. You need a garage, or you've got to buy a parking space, or you've got to get a parking ticket at the mall. There's a lot of costs associated with cars. And now if you've got a car that's autonomous, that can go around and essentially be like an autonomous Uber, the utility I think is going to be what's gonna be much higher perhaps, you know, and this again, there’s so much speculative," he told Faber.

Despite Musk then saying that the terms and conditions of using one's Tesla as a robotaxi have been set for some time—stating that this is only permissible through an official Tesla robotaxi network—Musk could not tell Faber how much of a cut his company would demand. Musk then went on to quote industry analysis by the firm Ark Invest, which repeatedly publishes outlandish predictions about Tesla's future share price.

Paul Hill

10th Jun '23

Thanks Edmund

To me it's going to be fascinating to see how Uber's business model holds up when Tesla, Ford, GM, etc launch their autonomous self driving 'robot-taxis'. Whereby owners can rent their vehicles to TSLA/OEMs whilst their cars are not being used and split the hire revenues.

Similarly, AirBnB is probably going to have to fight hard for its 15% booking fees when personalised AI discovery becomes ubiquitous - & probably cannibalises much of Google's search division too.

yiannos1

Do you actually think that Tesla owners are going to rent their car to be used as a taxi when not used ?

That’s nice!

11th Jun '23

Elon Musk certainly reckons so

https://arstechnica.com/cars/2...

That sounds like something similar to Chamath Palihapitiya saying that all Tesla owners will be utility operators!

Basically just total crap.

bullhead

I worked as a taxi driver on Saturday nights for a few years met an interesting array of characters the money was good because it was hassle

The thought of an owner sending their beloved Tesla off on Saturday night to pick up the customers I took home fills me with amusement even more so when they inspect their pride and joy Sunday morning

Mikex1

is there a UKL version of REUSE or similar circular economy ETF?

Yes that’s definitely one side of it which I totally agree, but the most importantly is the battery charge issue.

Alkmund

Edmund, thank you for another thought provoking article. There are some companies more obviously in the circular economy (eg Renewi (LON:RWI), I hold) but as the circular economy becomes a reality with reuse built into processes and supply chains then it will just become a part of doing business in most if not all sectors, similar to the internet. There are lots of good case studies on the Ellen MacArthur Foundation website https://ellenmacarthurfoundati... (I have met people from the Foundation but have no association with it). I believe that the future will be more circular, so my approach to investing is therefore looking for all companies to be considering how that translates to their business. Notably, this is much more than looking at ESG reports and scores.

BnB

There are surprisingly few direct investments in the circular economy theme. And certainly little UK-focused. I have a few plays on the idea, including Renewi, but most are international, such as Veolia, Tomra (reverse vending and sorting tech) or about to be, Smurfit Kappa.

As for renting out my Tesla so someone can get a high speed hand-job from his latest conquest on a Saturday night - I’ll get back to you I if I ever decide I can live with an interior that recalls Iron Curtain hospitality.

Chris Brown

12th Jun '23

In another thread a few weeks back there was talk about the VIX being quite low now and potentially a sign of stock market complacency. However, I commented that I generally feel a low VIX is a positive sign for markets.

I just came across this Twitter chart this morning, which does show that a VIX < 15 often coincides with long, boring bull markets. Simply something to be aware of and I don't have a strong view on US equity markets currently.

Helvellyn

Great article as usual Edmond.

Can anyone enlighten me as to why Spanish inflation should lead Europe by around 3 months, please.

Caper4

Regret I cannot but I do question who measures inflation per country and what the criteria is? Is it uniform across all countries in the Eurozone, for example ? But I suspect, those countries who don’t have an independent central bank may have political reasons for fudging the figures .

Think part of the reason is Spains use of Gas it isn’t really connected to the same network as the rest of Europe and is namely liquid natural gas and pipelines from North Africa

https://www.eia.gov/internatio...

£Atym also talked about this in their presentation on investor meet the company

Howard Adams

Hi Helvellyn

Just from general observations of news flows I have seen.

Spain is becoming an important producer of energy - solar, wind (and also gas I believe), to the extent it is becoming and exporter to other EU countries. I think this would be a beneficial reduction to their inflation figures (sorry can't recall the various sources I noted this factor from).

A portion from a ChatGPT prompt ....

Yes, Spain is a significant producer of energy. The country has a diverse energy mix that includes both traditional and renewable sources. Historically, Spain has been one of the largest producers of electricity in Europe.

Second, their growing season kicks in earlier than most other European neighbors, so I suspect their home grown food might be cheaper than other EU states in this part of the year. Furthermore these earlier foods are a major export source for Spain and thus lower Spain's imports in favour of exports. Both catalysts to reducing inflation.

Another portion of a ChatGPT prompt ....

Spain's ability to produce foodstuffs earlier can contribute to lower prices for consumers, as the availability of locally grown produce reduces the need for imports and transportation costs. It can lead to a more affordable supply of fresh fruits, vegetables, and other agricultural products within the country.

I must qualify that these are only my general observations (with ChatGPT responses, which could be false) and might not be valid assumptions at all. Unfortunately I have no knowledge of Spanish wage rates, economic growth rates, housing market health, and so on which all play into inflation rates.

Regards

Howard

Market Musings 090623: Economic Pessmism v Market Optimism