, February 04, 2023

Newsletter: Get ready for trouble

  •   5 min reads
Newsletter: Get ready for trouble

Will the wall of money collapse?
What does this mean for valuations?
The NASDAQ has already lost ten per cent, will it fall further?
What about the Bitcoin price?

Walls come down eventually. Or if they don’t, they become ruins. The Berlin Wall fell, The Great Wall of China eventually let the barbarians in. According to the Bible, the Walls of Jericho came tumbling down.

These days there is another wall — it is a wall of money created by central bankers. Money is just about everywhere, and it has pushed up asset prices to extraordinary levels.

And there is a lot of debt too — according to the IMF, global debt hit $226 trillion in 2021, and last year global debt increased by 28 per cent. As a percentage of GDP, global debt is at 256 per cent. It has never been so high. Public debt accounts for around 40 per cent of the total, with household debt and non-financial corporate debt making up the rest.

And now interest rates are going up.

The first signs of trouble are emerging in the bond markets. This Twitter thread tells the story just about perfectly. But the headline is as follows: “Last week was the worst calendar week for total return in bonds (taking into account yield and price) in at least 49-years,” which is as far back as the data goes.

What does this mean?

A couple of weeks ago, we told how the CAPE — cyclically adjusted PE ratio — which compares S&P valuations with earnings over the previous ten years, is only a few percentage points below the dotcom high.

Beware the CAPE — US equities look dangerously poised for a crash
Beware the CAPE. The cynically adjusted price-earnings ratio looks dangerously high. Are we getting close to a market crash?

Inflation is the worry. They say that once inflation takes hold, defeating it is akin to squeezing toothpaste back onto the tube . At Techopian, we have been extremely cynical about the view inflation is set to run out of control.

The risk lies with expectations. When people start expecting prices to go up, they change their behaviour. This behaviour change can become self-reinforcing and cause the very thing people fear to happen.

In this piece, we look at these ideas in a little more depth.

UK real wages fall will this spark-off inflation?
Real wages fell in the final quarter of 2021, official data shows, thanks to rising inflation. But does this mean inflation will rise further? It depends on inflation expectations, and it depends on technology.

Last week the Bank of England Governor warned that he doesn’t expect energy price rises to start reversing until next year.

Hold the horses, that comment was portrayed by the media as a bad news story, but if Andrew Bailey (The Bank of England Governor) is right, that is actually good news. If energy prices fall next year, then the inflation shock will be temporary, and all those inflation hawks who have been predicting a return to 1970s inflation will look a tad foolish.

Except we don’t know for sure. No one knows the future. If we could predict inflation two years from now with any accuracy, we would be some kind of god.

The point is markets are precariously placed.

That takes us to Bitcoin. Its biggest advocates have been warning about runaway inflation caused by central bank’s excess right from day one. In a way, the whole Bitcoin narrative these last ten years has been a consequence of quantitative easing.

Yet something odd has happened. Just as the very things Bitcoin advocates have been predicting starts to happen, the Bitcoin price crashes. And yes, crash is the correct description. The Bitcoin price has very nearly halved since November 2021. That is a crash by any investment book’s definition.

Will it fall further?

We consider that very question here:

The Bitcoin bull and bear: who is right?
A leading financial advisor says inflation will drive Bitcoin skywards as India prepares for Bitcoin regulation, and Taleb says Bitcoin is worthless

Meanwhile, back on Earth (sort of on Earth), the Metaverse is happening.

Apple says it is not a Metaverse company

Apple isn’t a Metaverse company but then again
According to a Bloomberg report Apple says it is not planning to be a Metaverse company, but then again this rather depends on what you mean by Metaverse

However that boils down to definition. Apple is preparing its augmented reality product. Whether you call it a Metaverse product is more a story about marketing than anything else.

For the title of the world’s biggest company, Apple has a rival. At least, for a few weeks last year, Microsoft’s market cap exceeded Apple’s.

Right now, Apple is valued at around $2.6 trillion (shares have fallen sharply since it passed $3 trillion), and Microsoft is a tiddler in comparison, worth a mere $2.2 trillion or so.

But Microsoft has new plans. As you no doubt heard, it is planning to buy Activision, although regulators may yet scupper the deal.

This is Microsoft trying to firm up its credentials as a Metaverse company. For those who know about these things, the claim that Microsoft wants Activision because of the Metaverse seems odd. Activision is one of the least Metaversie games companies out there.

But there is nuance, as suggested in this piece.

Microsoft answers call of duty with Metaverse pincer move
Microsoft’s acquisition of Call of Duty games developer Activision marks its latest move into the Metaverse.

It is partly about convergence.

There has always been a strong cross-over between the video games industry and the more serious side of tech. For example, Demis Hassabis began his adult life as a video games programmer. Nvidia technology was initially used to support high-quality graphics in computer games. Now its technology is used in neural networks. ARM, the chip company, kind of grew out of Acorn — at least the two companies have similar roots — and Acorn was a home computer company, with games an essential part of the business. Psion, the company behind the Symbian operating system, which Nokia eventually made its own, started life in computer games. The list goes on.

And that’s it for now, folks, enjoy your reading.

PS: Try and get words like Metaversie past grammar checkers — it is hard work.

Hope you enjoy the newsletter, let us know by emailing info@techopian.com and if you really like it, send it to a friend you really care about.

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