Morning Porridge – Sept 14 2023 – Soft or Crash Landing, Impeachment, and ARM IPO – what a lark…
“Surely you don’t mean that?” “Yes, I do, and don’t call me Shirley!”
Are global economies heading for a soft or crash landing? Why the Republicans seeking to impeach President Biden have just played a brilliant short-term political hand, and what the ARM IPO tells us about gullibility in bubble times.
Apologies for lack of comment y’day. I was on a call early-doors learning all about how to cut Capex and Opex costs on a project we’re pulling together. It was fascinating, and one day – when we’re ready to fund – I shall tell the tale..
Meanwhile, back in the real world.. My favourite aircraft quote is Chuck Yeager’s: “A good landing is one you can walk away from. An excellent landing is one where you can still fly the plane the next day.” Very apt when thinking about central banks and the global economy at present.
Listening to the financial authorities while looking at markets, numbers, and interest cycles, it feels like we are into the final scene of a 1980’s Airport Disaster movie… The stricken plane is on its shaky descent into the airport. Bits are falling off. One set of wheels is down, while the other is being cranked down by the plucky air-marshal and the pretty stewardess.. Will they succeed or will the plane skid into the Jet-fuel bowser left carelessly on the runway? Who knows..? The tension is building! The nun is playing the guitar… and it’s not a good day to quit sniffing glue..
The global economy is hoping for a soft-landing, but a former US treasury sec thinks the chances are falling and a smash looks more likely. Just like on our crashing plane, the problems are multiple. US consumers have spent all their Covid savings and are leveraging up into financial penury. Credit conditions are deteriorating. Banks are increasingly nervous – and investors nervous about them. Yet, the mood in markets is Euphoric – and we’ll deal with the current tech addiction in a moment. We might even get a terminal stagflationary cataclysm as the downside option as the global economy “experiences an unanticipated flight termination”.
However, Rule One of Airport Disaster Movies is someone always survives – no matter how improbably. Differing opinions make markets. I’ll stick to my mantra “things are never as bad as we fear, but seldom as good as we hope.”
Although the ECB may hold off on a hike today, it still has to juggle multiple nations’ economies vs its inflationary brief. Central banking by committee is never easy. There will be troubles ahead.. but again no reason to panic. The ECB succeeds by simply boring worries and dissent to death. Relax and let it happen.
Here in the UK wage inflation looks fully embedded into the equation – yet the government is trying desperately to ignore the implications: falling Inflation is their one and only electoral hope. If not, their only hope is to aggressively undermine the opposition, meaning the UK 2024 is likely to be the most fraxious, aggressive and polarising in UK history. It will sicken everyone. The only thing we can say with confidence is – it won’t be as bad as the next election in the USA
Like it or loath it, politics will be a massive market distraction in coming months.
The Republicans threw a new spanner into the machine on Tuesday when Kevin McCarthy was bounced into announcing an investigation prior to the impeachment of President Joe Biden. Was anyone surprised? President Biden is accused of profiting from his son’s business dealings while Vice-President from 2009-2017. The impeachment charge stands zero chance of success in deposing Biden – it will fall in the Senate if it even gets that far – but what is important are the political signals and messages it conveys.
Many reckon the Republicans have gone too far with what will likely prove a baseless allegation of impropriety. Many will remind the GOP that “people in glass houses should not throw stones”. That the impeachment will likely as not uncover no real evidence, and will consume a vast amount of time, effort and resources, while further distracting from the very real problems in the economy and government’s ability to ameliorate these, is likely fact.
But impeachment is a political weapon to wield. I reckon the Republicans have just played a brilliant hand putting the impeachment card on the table. It’s potential to distract, redirect and redefine the argument makes it, perhaps, the most clever political indictment of all time.
Joe Biden is not a “loved” president. And it’s not just the obvious age thing. Even within his own party, Biden is perceived to be the consummate political insider, a man who has spent his life sequestered within the political elite, hobnobbing at the very top of US society. He is part of the US elite, a tiny group of the powerful, the wealthy, those with access to power, to capital, able to put their kids into the best schools (through legacies), able to access the best job opportunities through connections and nepotism. It has become a de-facto aristocracy – and Biden is perceived as part of that elite.
In contrast, Trump’s great success is convincing conservative America he’s the disruptive outsider – despite evidence to the contrary – come to smash “The Blob”, and restore the freedoms and opportunities to the people back from the elite.
Mud sticks in different ways. It will stick to Biden and his ungifted son because they are the elite. It doesn’t stick to Trump in the same way – he was filthy already.
If the social manipulators behind Trump play it well, even Democrats will start to wonder if Joe Biden was orchestrating millions in bribes through his son’s businesses. Doesn’t actually matter if it’s true, or if there is a laptop the idiot son left in a repair shop. Trump’s faction will forgive his misdeeds as a patriot and because he is an outsider. Biden is at risk as an elite insider. Trumps GOP strategy is to pin the blame for the failure of the American Political dream upon Joe – the elite insider.
Markets should be nervous – the impeachment will counter Trump’s legal problems, and it may mean a massive political shock and destabilisation on the way. Time to diversify.
If you are looking for precedent or clues, it might be worth thinking about Ancient Rome from 139-27 BC. Don’t worry, I’m not going to do the full Decline and Fall of the Roman Republic, but suffice to say SPQR under the Eagle meant something very different after the Republic fell and was replaced by Empire. There are parallels between division in Rome and polarisation in the US.
The collapse of the Roman Republic took just over 100 years. It spawned bitter civil wars, judicial murders, assassinations, chaotic anarchy, divisive politics between populists and despots, but at its heart was a fundamental mismatch across the economy – chronic income inequality that broadly left the Senate of Rome and the People of Rome at each other’s throats. The rich owned all the land – the means of production and wealth – and the people wanted their share. Landowners were loath to give any up – leading to rising urban poverty, social instability and conflict. The Gracchi brothers and later Marius, (the general who ended the property qualification to join the army, and created the unbeatable legions (“Marius’ Mules) of Roman Citizens promised land on retirement), became populists challenging the landowners, who resisted – hence the decades of instability, and the inevitability of Augustus Caeser taking the Imperial Purple in 27 BC – after destroying all opposition.
America today may face a similar bust. Trump claims to be the populist, the reformer, but is trapped in the consequences of his own actions and the untruths attendant on that. Yet, he still appeals to the large number of conservative Americans who sincerely believe the narrative their Republic is being torn apart by an evil coalition of Democrat Socialists, Wokery, Pizza Shops and the Blob. It suits many to believe that. Equally it suits others to deny him.
But the reality is embedded systemic inequality and rigid social opportunity. The working classes have a limited economic voice – they work, they pay taxes, and are properly grateful. The middle classes are increasingly hollowed out – and about to become more so as AI takes over their jobs. They are increasingly vocal about poor politics, iniquity and injustice. They are right to be do – inequality of opportunity: whether it be access to career, college and income opportunities, or justice seem to naturally flow to these who already own these opportunities – to which they cling. The kids of the elite have little to fear – they will own AI.
Which leads us to the stunning success of the ARM IPO – and you know that statement is dripping with malice and sarcasm. If ARM is worth $54 bln, my name is Shirley.
See if you can figure it out: some of the largest Tech firms – all of which claim to be AI based investments, and seeking to benefit from the AI everything bubble, are in as anchor Investors: Nvidia, Intel, TSMC, Apple, Samsung, Google (Alphabet) and Microsoft are all supporting the deal. Or more properly supporting the AI narrative that supposedly underlies the deal. If they didn’t and the IPO had crashed… well, just imagine the fallout on AI would do to their own stock valuations. They won’t take much stock, but by buying it they have protected their own valuations.
Meanwhile, the 28 banks supporting the deal and taking the hefty fees Masayoshi-Son has offered them are equally beholden to the deal’s success – $17.5 mm each for the four leads – hoping for further juicy treasure from Softbank. Full respect to leading tech-sector bank Morgan Stanley – the name of which does not appear on the deal. More to the point, Masa already pledged 75% of ARM as collateral against a $8 bln bank loan. The IPO makes the banks even happier.
In the wake of the pricing Masa is on the wires telling everyone he wasn’t going to be greedy, resisting a higher price because he cares so much about the investors in the deal… Sure he does. The reality is ARM has persuaded investors its all about AI. Yes, it designed the architecture for Nvidia’s AI Chip-sets, but the bulk of its design licencing is smart-phones. Its largest single customer is its own China arm – which is a managerial mystery. Its business has flatlined in recent years; and 5 years under Softbank saw it achieve diddly-squat… but it’s worth 100x earnings? At $51 per share, investors are taking an awful lot on spec in terms of how it builds a niche in an increasing competitive and shallow-moated AI sector.
Believe what you want to believe… but be sure that is not what Masa wants you to believe. If there is one thing we should give him credit for, its timing… the first big IPO into the AI bubble… of course you want to dress-up a simple license and design studio as the AI power house. Just like WeWork was not an office rental business, but a Tech megafirm.
Sure it was.
Out of time, and back to the day job
Strategist – Shard Capital