What comes next for the markets?

The answer largely depends on your time frame, but there’s certainly no shortage of things to consider.

‘Superbubble’ warning

Jeremy Grantham, the permanent bear, co-founder of asset manager GMO, has become so famous for calling bubbles that it can feel like this is his permanent stage.

This week, he declared that the end of the bear market rally after Powell’s speech was evidence that we are nearing the end of a “super bubble” similar to those of 1929-30, the early 1970s and the dot-com disaster. from 2000.

“Only a few market events in an investor’s career really matter, and among the biggest are superbubbles,” says Grantham.

“These superbubbles are events like no other: while there are only a few in history for investors to study, they have clear features in common.

“One of those features is the bear market rally after the initial downgrade stage of decline, but before the economy has clearly begun to deteriorate, as it always does when superbubbles burst.

“This, in the three cases above, recouped more than half of the market’s initial losses, luring in unsuspecting investors just in time for the market to go down again, only more viciously, and the economy to weaken. This… rally so far has fit the pattern perfectly.”

Calling bubbles, much less classifying them as Grantham has tried to do, is terribly difficult, especially since it’s hard to know you’re in a bubble until it bursts.

collision course

What was most interesting to Chanticleer is why Grantham is so concerned: the collision of deteriorating short-term factors with serious long-term problems suddenly coming to a head.

The first category will be familiar.

The war in Ukraine has put incredible pressure on global energy, fertilizer and food supplies, which we are seeing in Europe (where energy markets are spinning wildly between rising gas and electricity prices, and suggestions that politicians could impose price caps to protect their citizens) and Asia (where the Sri Lankan economy has effectively collapsed as oil prices rise).

In China, which has driven global economic growth for decades, Grantham says “too many things are going wrong at once” as the fight against COVID-19 slows the economy and the real estate sector faces waves of stress.

Each cycle is different and unique, but each historical parallel suggests that the worst is yet to come.

Jeremy Granham

And then there is the historic global tightening of monetary and fiscal policy that Powell’s speech shows is far from over.

Grantham’s long-term concerns are what many investors probably had on their minds, but are now getting more attention.

Population, through a combination of depressed post-pandemic migration and declining fertility rates, now presents a challenge to many countries, especially China and the developed world.

As the world reels from increasingly frequent and larger climate disasters (historic flooding in Pakistan just months after historic heatwaves, drought across much of Europe and the US) has escalated.

But Grantham also points to a shortage of the metals needed for decarbonisation, as well as vital raw materials like fertilisers.

“Between COVID in China, the war in Europe, the food and energy crises, the record fiscal tightening and more, the picture is much bleaker than could have been anticipated in January,” he says.

“In the longer term, widespread and permanent shortages of food and resources threaten, all made worse by accelerating climate damage.

“The current superbubble presents an unprecedented dangerous mix of cross-asset overvaluation [with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum]the commodity shock and the aggressive stance of the Fed.

“Each cycle is different and unique, but each historical parallel suggests that the worst is yet to come.”

In particular, Grantham does not single out geopolitical tensions as a major concern.

economic war

But this has increasingly become the focus of respected investment strategist Zoltan Pozsar of Credit Suisse, who has been arguing for some months now that the world is moving toward a state of economic warfare between the West (mainly the US and Europe) and the East. (Russia and China), breaking the peacetime harmony that allowed globalization and low inflation to flourish for much of the last three decades.

“The low-inflation world had three pillars: cheap immigrant labor that kept nominal wage growth “stuck” in the United States; cheap Chinese products lifting real wages amid stagnant nominal wages; and cheap Russian natural gas that supplies German industry and Europe in general”.

Clearly, this harmony is under heavy pressure.

Pozsar has a lot to say about how this economic war will play out, including the involvement of states like Iran, Turkey, and South Korea, but his main point is that “wars, like the economic war that is currently unfolding, are about the control. The control of technologies (chips), basic products (gas), production (COVID-zero) and straits: bottlenecks such as the Strait of Taiwan, the Strait of Hormuz or the Bosphorus Strait”.

If the West wants to win this economic war, Pozsar argues, it will have to do four things: rearm; relocation manufacturing (particularly key technology, such as computer chips); replenish and invest (in raw materials); and reconfigure the energy grid to support the energy transition.

Investors, he says, should note that this list is commodity-intensive, capital-intensive, and insensitive to interest rates (meaning the West has to spend regardless of whether rates are 3.5 percent or 7 percent). percent), and uninvestable for nations like China (which has financed so many US loans in the past, but probably won’t want to in the future if it fuels spending that goes against its interests).

This world is inherently inflationary.

“Commodity intensity means inflation will be a persistent problem as the West runs on the old list,” says Pozsar. Rearming, re-shoring, restocking and re-wiring require many basic products. It is a demand shock in a macro environment in which the commodity sector is woefully underinvested, a legacy of a decade of ESG policies.”

It should be noted that not everyone shares the view that geopolitical tensions are automatically inflationary.

Macquarie strategy guru Viktor Shvets says that while war and geopolitics can have short-term impacts on supply and demand, “it is also a process, not an event, and the key from an inflationary perspective. and investment is to identify times of extreme stress. that will be followed by periods of relative calm, when the economic impact will be much less pronounced.

“We contend that the coming years are likely to be less intense and therefore we expect a reorientation of commodities, albeit a painful one for some regions. [like the EU]it will proceed without globally devastating results,” he says.

“We also believe that we are not short of most industrial commodities (from coal to oil) and where we have shortages (eg cobalt, nickel, etc.), these are long-term disinflationary agents. [given greener energy is also cheaper energy].”

Shvets has long questioned whether, in a world as financialized and indebted as this one, central banks can keep raising rates without risking contagion; he sees “not a soft landing, but not a hard appreciation of assets either.”

It’s an important counterpoint to Grantham’s grim prognosis. But for investors, it’s not about betting on any one outcome, it’s about thinking about how to build a portfolio that can navigate this unique combination of long-term and short-term risks.

And Australia is not the worst place to do it.

While an era of shortages, climate change and rearming, restocking, restocking and rewiring is likely to prove inflationary, many of the vital ingredients to meet these challenges are provided by Australian companies.

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