Happy New Year Swampians! Have you been enjoying the holiday gift of market turbulence? Neither have I. But I have been thinking about what the new market narrative will be. We are clearly in the beginning stages of what will be a major shift on that front.
There are many reasons for the current turbulence. Some of them we’ve known were coming — the deleveraging of Fed’s balance sheet and interest rate hikes, for example, and the credit crunch and flight from risk that is the natural result of a decade of debt build-up (just try issuing junk bonds these days — it’s not happening).
Other triggers are specific to this administration such as the US-China trade conflicts, or, for governments abroad, the French street protests against Macron and the questions about eurozone stability.
Still others are down to the personality of this President. Given that there’s research showing that voters are especially sensitive to market gyrations because of their effect on retirement portfolios, Trump should really stop trying to undermine Jay Powell. Live by the market, die by the market.
But there is another factor driving stocks into bear market territory and widening credit spreads. That’s the sense that there’s no clear new narrative. The last decade was characterised, of course, by low rates and easy money bolstering asset values. The crowd wasn’t paying as much attention to structural factors — it was more about how long central bankers would be the “only game in town,” as Mohamed El-Erian puts it.
That narrative was easy and addictive, and investors are desperate to get back to some form of it — witness talk just a few weeks ago about the “Powell put,” which you may hear again if rate hikes slow or stop. That won’t happen. But while the economic risks ahead are clear — a synchronised global slowdown and continued populism making it difficult to shape effective policy — the new normal is not. What are the underlying structural shifts that will drive the market narrative of the future?
On that front, I think there are two things investors should pay close attention to in the year ahead.
First, technology and tech-based disruption is likely to exert a powerful deflationary effect in more and more industries. The big story of 2018 was the power of the Faangs (Facebook, Apple, Amazon, Netflix and Google), but the bigger one for 2019 will be the way in which technology is reshaping every industry (for a few surprising facts on that front, check out my Monday column). Business will become more efficient but pricing power will be damped. Labour will continue to be under pressure as software displaces jobs. Both shifts will keep inflation lower than many expect.
The second factor will be the disappearing middle. Concentration has been increasing in all industries for some time, but look for that trend to speed up and spread as technological disruption (which also appears to be behind some of the superstar effect) plays out. I think this is going to have a big effect across all sectors — unless of course regulators finally put a halt to big mergers. Whether that will happen will be the subject of a future Swamp Note.
• I was struck by this New York Times piece on the fractures within the Women’s March movement. This is exactly the sort of risk to Democrats from identity politics that I have been warning about. Certainly, both anti-Semitism and racism exist on the left as well as the right. But liberals need to be wary of going to war with each other as they tackle such topics.
• Meanwhile, I thought columnist Bret Stevens got it exactly right in his letter to Anonymous.
• In the FT, don’t miss this nice round-up of what my colleagues and I found most disruptive in 2018
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