Over in fixed income, yields were a little changed, with the 2Y at 4.28% and the 10Y at 4.51% as Bessent doesn’t seem overly interested in increasing the duration of the Treasury issuance. In Fedspeak, St. Louis Fed head, Alberto Musalem expressed some concern over the risk of un-anchoring inflation expectations.
The dollar hasn’t exactly been killing it of late, but gold has. Treasury Secretary Bessent spoke about both the Dollar and Gold yesterday. With respect to the dollar he indicated that he favors a “strong dollar policy”, but believes China is manipulating their currency. When it comes to gold, he clarified that “revaluing gold reserves is not what I had in mind.”
There is a saying that almost everything is noise. Obviously we strive to find some signal in the noise and often that is found by zooming out to see the broader patterns and trends because the small incremental changes are so hard to see in the moment, but ultimately compound to have large effects. One broader pattern that seems to be at play currently is in the realm of international economics. We talked about trade, but more broadly there is a topic called “Geo-economics”, which is the study of the interaction of geopolitics and economics in foreign relations. Geo-economics is an attempt to discuss how countries use economic means of power to achieve their strategic objectives. The term was coined by Edward Luttwak in 1990 who argued that power comes from "disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advancement, and market penetration in lieu of garrisons and bases". My personal introduction to the subject was via the book “Geo-Economics” by research analyst and former chief investment officerJoachim Klement.
I bring up the topic today because it seems to be a topic that is part of a pattern that has been playing out over many years now. This week we all see the headlines about Ukraine and obviously China is always front and center, but in the headlines we tend to get myopic and can easily get trapped in the noise. There are a few voices out there that help capture the broader trends, an example being Ray Dalio’s work, “The Changing World Order”, that attempts to provide deeper context to the barrage of headlines, but it is easy to have our attention stolen and focus on a trivial issue and miss the vital signals. I won’t write today about the various geo-economic forces between the U.S. and Russia, or the U.S. and China, but the message is to step back and in some ways get back to basics on what geo-economic risks are important and can possibly be quantified and what might be the impact on various assets. What are sources of actual meaningful data, not just headlines that matter? I don’t have all of the answers, but there are some geopolitical risk indexes and economic policy uncertainty indexes that might be useful. From an investment standpoint it’s always difficult to discern what’s priced in and whether risk-premiums are appropriate, I'll leave it to you to decide.
On the day ahead it’s S&P PMI’s, Existing Home Sales, UofM Feb (final) and whatever news comes out about tariffs or whatever else.
XTOD: Satya is Out TLDR: MSFT doesn’t believe in AGI, wary of overinvestment, OpenAI partnership is over
A. AI and AGI are overhyped
- “Us self-claiming some AGI milestone, that's just nonsensical benchmark hacking to me. The real benchmark is: the world growing at 10%.”
B. Very negative on more capex spend from MSFT
- “[If you look at the Industrial Revolution] there was a lot of money lost”
- “…countries are going to deploy capital… I'm so excited to be a leaser… I build a lot, I lease a lot.“
C. Value in AI is in infra where there is overbuild, and B2C apps which OpenAI has won, negative on model layer
- “in consumer, in some categories, there may be some winner-take-all network effect. ChatGPT is a great example [of a] at-scale consumer property that has already got real escape velocity”
- “[in enterprise] buyers will not tolerate winner-take-all. … where the buyer is a corporation, an enterprise, an IT department, they will want multiple suppliers.. That is what will happen even on the model side.”
- “In the model layer, one is models need ultimately to run on some hyperscale compute.”
Opinion
————
1. Satya is calling the bubble in buildout. The crazy people like govts are entering the game. He’s happy to lease from them when they overbuild. His own capex spend is capped
2. He’s disappointed in the OpenAI partnership - he sees them as having built a great consumer app for themselves with dominance in the category, but models for enterprise usage have gotten commoditized.
3. He’s sooo done with the AGI talk. If you can’t get to 10% global growth your AGI talk is meaningless to him
4. He’s backing MSFT from the capex precipice. It’s funny because he certainly did make Google dance, and now they’re committed to insane capex. But he’s outta here
One of the most meaningful @dwarkesh_sp interviews so far
XTOD: The last 24 hours has had SO much tech news.
— Microsoft Majorana 1 quantum chip
— Google AI co-scientist
— xAI Grok 3 model release
— Clone musculoskeleton
— Claude reasoning coming soon
— Arc institute biological model
— Sakana AI CUDA kernel optimizer
XTOD: BESSENT SIGNALS DOLLAR POLICY CHANGE
BESSENT Wants the Chinese to play their part in a global rebalancing.
Threading the eye of a needle, the US Administration wants strong dollar fundamentals but a drop in its value. This will have huge repercussions across all assets
As clear a message as ever there was one. There is a deal to devalue the “strong dollar” especially bs the RMB. This will have massive reverberations on risk assets. The dollar will drop precipitously. Stocks across the board will get a huge boost as global growth rises in a weaker dollar environment. The question is whether China and the US can come to some for of agreement where the trade off between hostile trade processes / tariffs is sufficient to allow Chinese and other central banks buy US bonds. To be clear if that trade off can be found, we’ll see a massive reallocation out of gold and into US bonds. The message rhe Trump administration are sending on the debt/deficit might with foreign CB participation at increasingly large US debt auctions might be enough to stop US 10’s breaking 5%. One other dimension that is profoundly important is the recent focus by Xi on reinvigorating the private sector ( look where Chinese tech stocks were when Jack Ma was taken in for reprogramming ) and today.
In recent days we’ve also had a commitment to support consumption.
In my mind Chinese tech stocks will continue to confound global investors where there is a massive underweight. Unfortunately the anti China hubris and invective means many are still way behind the 🎱on long China tech.
So much lower dollar across the board.
I’m bearish gold
I’m bullish US bonds but prefer buying nearer 5%, but you have to have some here.
Long China tech and the Mag 7.
XTOD: Roughly half the IRS agents being laid off are in the division that handles filings from small business owners and the self-employed, according to CBS. Notable: Business owners and the self-employed are responsible for a massive chunk of tax dodging each year.
XTOD:“Think of how stupid the average person is and then realize half of them are stupider than that.” - George Carlin
https://x.com/8teAPi/status/1892383248661274699
https://x.com/deedydas/status/1892456208466108527
https://x.com/CurrencyWar1/status/1892557401896685950
https://x.com/JHWeissmann/status/1892639316569939969
https://x.com/Super70sSports/status/1892594419196440785
No comments:
Post a Comment