Blain’s Morning Porridge – December 11th 2023: Reasons to be Cheerful Part 33: It’s just a Business Cycle.
“Why don’t you jump back into bed…”
There is a lot of doom and gloom out there – but we really shouldn’t flaff about how bad markets may get in 2024! Its just the downturn of the business cycle! Realising that’s what it is means the bottom is approaching… but not without some peril!
Reasons to be Cheerful Part 33: It’s just a Business Cycle.
Apologies for late porridge this morning. That was a big weekend. My head is… full of cotton wool…
I wrote about my expectations for 2024 last week – these boil down to interest rates not rising, but staying higher and elevated for longer. Some say that will be a good thing – normalised real rates around 4% will have significantly painful, but cathartic positive effects on markets and the economy. A pandemic of necessary corporate failure pour le encourage les autres will certainly weed out the Zombies and remind business and commerce of the consequences of debt. It will be good for capitalism as a whole. Not so much for families reduced to poverty because of bad corporate board decisions in the period of easy money.
Although some believe a soft landing means a boom time is coming, it seems more likely some scale of slowdown is inevitable in 2024 as the lagging consequences of higher debt, lower liquidity and lower spending hit consumers, corporates and governments. That should come as absolutely no surprise to anyone – it’s basic business cycle 101. (Some countries will do better than others – don’t bet against the USA.)
Since we are in the down-wave, the critical questions are when and where will this cycle bottom?
That depends on it’s amplitude – how deep will the peak to trough go? How nasty a downturn, recession, depression, crash is coming? A number of factors will prove critical. Just because the last “boom” wasn’t strong, doesn’t mean the coming trough won’t be deep. I suppose some very smart chap quant might be able to write an algorithm to calculate the depth of downturn, and the speed at which it cycles through to recovery from all the data we have – like last week’s inconclusive US employment report. The imbalance between the quantum of debt and its rising cost is clearly just one factor.
There are negative feedback loops at play: when high deficits and borrowing costs cause governments to cut spending aggressively, the scale effects felt by consumers and corporates are harsher, causing them to cut their spending more. All sorts of secondary effects – like workers demanding higher wages in periods of high inflation also make the equation more complex.
But there are also learned “human” experiences and behaviours that will impact the equation. Because interest rates were so low for so low – effectively making money costless – it’s going to take the whole economy longer to re-learn that money has a cost, potentially causing the adjustment/transition period to lengthen. (A factor that is fuelling the fervid speculation about how quickly rates are about to fall. Clue: they are not.)
For those of an age to remember double digit interest rates – we can accept there may be more pain to come. Anyone under 40 in this market will only remember ultra-low interest rates and is going to struggle with the consequences of money having a higher price. I still find myself talking to younger portfolio managers who think central banks and governments are going to step in with another bout of QE (quantitative easing) and ZIRP (Zero Interest Rate Policy) should the economy splutter from a recessionary flu.
But if we just look at monetary and fiscal policies, and the economic data, we may be missing key indicators and events driving sentiment.
Recovery is also dependent on leadership and policy – the key to my Virtuous Sovereign Trinity concept is how nations with stable currencies, sustainable debt markets and competent politics will do well – weathering business cycles in good shape. When political competency breaks – as seems to be happening across the west as the Conservatives degenerate into bickering irrelevance (I’m not sure who the good vs bad Torys are anymore…), or America get sets to re-elect Trump, while Europe embraces the Far Right – then the impact on market sentiment could be substantial.
Further pressures will come from geopolitical conflicts. Western militaries are rightly concerned that Russia is beginning to look more than vaguely competent on the Ukraine battlefield. 2024 will likely confirm Russia has moved to a total war economy. At enormous cost to growth, factories are producing new weapons to equip new armies of better trained conscripts. The rabble who were beaten in 2022 are now holding strong defensive lines, while Ukraine is struggling with manpower, fatigue, and motivational issues as the political consensus in Kiev is apparently unravelling.
One of the really interesting concepts to emerge from Conflict – the new book by General David Petraeus and historian Andrew Roberts – is how the politicians who declare wars and the soldiers leading the armies that fight them must master four tasks:
- Get the BIG IDEA by grasping the overall strategic situation to craft the right strategic approach.
- Communicate the Big Idea, the strategy clearly to their armies, their allies and other stakeholders.
- Implement the Big Idea with resolution and determination
- Refine, adapt and improve the Big Idea.
Exceptional strategic leadership is a prerequisite for success! By undermining Zelensky, creating communications frictions between him and the army, and destabilising the Big Idea of retaining independence and a reuniting the nation by recovering their occupied territory, the original Ukraine Big Idea now seems untenable. The situation has changed. Does that make peace in Europe more likely? Will Europe again binge on Russian energy, or will the Bear threaten to hug us?
Balance any upside lift from a Ukraine ceasefire vs the threat of resurgent Russian military threat. Putin will have beggared Russia and feel the only way to show a dividend will be completing his war in Ukraine or outright conflict with a diminished NATO. It feels like a long period of European cold war approaches.
Meanwhile, and back to the business cycle: this wave is part of a rising long-term trend – a cycle in itself driven by growth and new technology. There are many who believe in the 50-75 year Kondratieff cycle – which was first spotted by Russian economist in copper and food prices: each new technological revolution created a new demand for copper, pushing copper into it’s own long-term cycle. Copper prices rose as tech like steam engines, steam trains, steam ships, electrification, aircraft and automobiles, and petrochems drove new long-term demand for the metal. The current IT, digitial and mobile tech revolution is about to be superseded by new super-cycles driven by AI, climate change renewable energies, biotechnology and healthcare, and stuff we haven’t even thought-thru.
And copper prices are set to rise as we work out just how much new wiring we will need in the electric economy. Over the weekend I was told there simply isn’t enough copper to rebuild global grids to the scale the new economy will need!
No time for five things…
Out of time and travelling tomorrow..
Bill Blain
Market Strategist
3 Comments
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Thanks to Will Nutting for this from “NUTSTUFF”:
UK and US military are concerned Russia’s battlefield competency, tactical skills and logistical abilities have improved dramatically over the past few months. The russian military industrial complex is in full swing and it should not be taken lightly. This will only supplement a steady supply of North Korean ammunition and Iranian drones – which they are learning to use effectively.
Strategically they have few options at the moment but “holding the line”. They are likely to remain impregnable and on the defensive through 2024 before new recruits are trained and new weapons
(ranging from a revised T-14 Armata tank, ground-t-ground missiles, longer range rocket batteries and improved personal battlefield arms) arrive in numbers as a result of complete rebuild of their armaments industry.
They have however worked their way through bad leadership, leaving a cadre of battle-hardened NCOs, junior
officers and tactical leadership in place. Troops are better led and cared for. (This is standard Russian practice, get stuffed at the start of any war, but life is cheap, before relearning professionalism.) Putin has pulled away from directing the battlefield and now let’s senior officers do their jobs.
Nothing Ukraine can or will do will make much difference, aircraft are not going to help, the air-land battle space leaves them too vulnerable. Tanks are proving obsolete vs tank killers (a lesson from as far back as 1973!) Boots over ground counts and they are exhausted, running out of men, but are now struggling with motivation. We constantly hear “The Russians will still struggle to “beat” Kiev” but honestly this can only be believed by people who do not know the facts. The tragic facts are that the only exit for Ukraine now is likely to be a ceasefire and de-facto annexation of land behind the current front line.
As to Putin. Lets be very clear there are for now absolutely no expectations of a leadership change in the Kremlin.
Ruzzia is a nazi terrorist state that must be stopped at all costs.
Ukraine should now be armed with nukes to deter the invaders from taking any land
Crimea is Ukraine, and if not given back other commie dictator regimes like China will be signaled that they can invade any country they want too
Just reading Antony Beevors (recent) stunning account of the Ryssian revolution – 1917 to 1921. Much we didn’t know emerges, especially the social complexities of Russia, a country with an economy smaller than Hollands. I’m not sure Russia can sustain conducting war for too much longer before social cohesion begins to fracture.