alt-think.com

Dear Friends,

“komm lieber Mai und mache die Bäume wieder grün” or in English “come, dear May, and turn the trees back green again” is a world-famous classical folk song from Mozart. While markets are fully embracing these spring feelings, we might soon enter into more of a Wagner’s Götterdämmerung scenario both in economic and political spheres. A truly dramatic scenery is evolving. Do you remember the times when fundamentals counted? When did you need to read a balance sheet to understand a business? When analysts were driving stock prices and not influencers? When people bought Krugerrands and not Dogcoins?

Welcome to a global economy driven by central bank steroids and magic fiscal spending mushrooms, where the Elons and Robin Hoods are creating stock market frenzies in epileptic trips, where interest rates are non-existent, strong inflation reserved for Turkey, an economy dominated by millions of legacy zombies and tech billionaires who start to make the Vatican look pale on their inquisition track record. Welcome to a world in which billionaires are made overnight and billions of hard workers have no chance to ever afford homeownership. The mother of all bubbles is expanding until it will explode in a non-woke cancel-culture cataclysm. The simple business rule is still (hopefully) holding: when the economic facts are engineered and bent to explain the euphoria, and the euphoria is not nurtured by the facts, the correction is close. And when the societal gap is too big and widening too fast, a paradigm shift is looming with the pendulum swinging to the opposite.

Be prepared for a hot May, and digest the following food for thought:

1. The Global Economy in the Covid-19 Endgame
   

The global narrative and reason for hyper-bullish markets is a bet on a repeat of the golden 1920s after the end of the Spanish flu. Economies that are on a nitro-boost from big-time Government spending, cheap central bank money, huge and accelerated digitalization thanks to Covid, spending spree from consumers and corporations to catch up on the forced lock-down breaks, and a relief and freedom rally that joyful life is back after Covid restrictions. And of course, an inherent belief with market players that both central banks and key Governments cannot let markets go down and interest rates up for the sake of their very own balance sheets. A little party never hurt anybody! But watch out for persistent party poopers. The moment of truth will come soon and bring heyday or mayday in May. Out top-ranked party poopers are:

• Covid Help Programs including generous subsidies and support payments, furlough schemes and insolvency protection are running out in parallel to the progress of the vaccination levels. This is nothing else than a fiscal tapering which will happen simultaneously in all major economies. Job markets and consumer spending might suffer more than expected.
• The corporate real estate market is in for a major setback with high-street retail, hotels, and office space segments heading for revaluation. This might turn ugly and critical for over exposed lenders and funds and put severe pressure on the loan market.
• The US China economic cold war is expanding. It might lead to further distortions of global value chains, and for sure result in price increases and reduced competition/productivity. Many players might also be forced into a “Us” or “Them” decision.
• Corporate earnings might be worse than expected and the economic recovery slower than expected. Despite many positive signs, the world is far away from pre-corona output and consumption.
• We are still waiting for the first real China recession, which will rattle the World, once it occurs, as more and more countries are over-dependent from the Chinese market.
• And finally, the forgotten Brexit. While buses are burning again in Belfast, and trade relations between EU and US are down in double-digits, the new trade agreements of the UK have yet to materialize. The Tory dreams of a soft-power superpower might be short-lived with the narcissist boy group from Trump to Bolsonaro out of office or reality check.

2. The Potential Black Swans in May

While there is ample reason to believe in an ongoing party as into the beginning of a market downturn, it might be again the black swans forcing the hands and pockets of investors, governments and central banks. The new US administration will get seriously tested soon with an EU in complete disarray after a failed vaccine campaign, a lame-duck government in Germany, and humiliated by Russia and Turkey in foreign policy. 

• Russia is saber rattling and turning up the heat on Ukraine with massive military pressure at its border. Escalation can happen any day. Belorussia, Armenia, and Georgia will watch closely.
• China is continuing to build up its military presence and pressure in the South China Sea, Taiwan is still on the wish list. Neighbours get more and more nervous.
• Iran/US talks have restarted around the JCPOA revival. Serious sabotage to these talks can be expected from Israel (as seen in Natanz yesterday), Saudi Arabia, and the Republicans. Revenge actions will swiftly follow and we have lately seen in the Suez canal the consequences of blocked waterways.
• A US cyber-attack and retaliation for Russia’s involvement in the US elections and SolarWinds intrusion is imminent. Depending on the target area and scale, there is a clear potential for escalation.
• The golden capitalist era comes to an end. Reaganomics has brought us an incredible shift of power and wealth from citizens and governments to corporates and the top 1 % of wealth holders. The Biden administration is leading the world to a major paradigm shift. Taxes will rise and significantly, both for corporations and individuals on value gains, high personal income, and wealth. This will ultimately lead to lower corporate earnings, positive interest rates, and higher inflation. And a full revaluation of all asset classes. Turmoil insight.
• And what about Covid? Thanks to failed containment in the beginning and the current egoistic national vaccination strategies, the World has created a perfect breeding and mutation ground for the virus. It has yet to be seen, whether the current vaccines will be stronger and smarter than the mutation dynamics of the virus, and there could still be a rough awakening in the winter season 2021/22.

3. Will FOMO turn into GOMO?

As in politics, markets are also experiencing their post-truth investment reality. Trend and mood-driven markets, that are much more impacted by influencers than fundamentals. Events are digested instantly and compressed in very short time windows. In this environment, forecasts are naturally suicidal. Mayday or Heyday?

We believe in strong long-term growth, driven by technology, breakthroughs in health and aging solutions, an eco-boom, the restructuring of global value chains back to the consumer, and a redistribution of wealth to the middle classes. But we also believe, that a market correction and catharsis is over-due and might show up in May, with markets having fully anticipated and priced in an enormous post-covid boom of major economies, and the full defeat of covid. This mindset is very sensitive to any setback. The time for Zombies might run out.

So, if you are FOMO on booming stock markets, cryptos, or other assets, you might soon be GOMO.

And, if you have gained a lot in the covid crisis, we would definitely recommend going for the extra hedge.

Watch out for May. Stay liquid.

Best

Marc