CEO of Gavekal Research, Louis-Vincent, discusses the S&P 500 Christmas Rally, tech companies’ index composition, the trade war, the return of inflation, and gold’s comeback.
• He notes that if the S&P 500 (in terms of % return) was a stock it would have outperformed 78% of stocks in the world this year. He explains that massive liquidity injection in the shape of both easy monetary and fiscal policy is the main force behind this rally.
• Next, he highlights that tech stocks are at the same % of SPX Composition as the 1999 bubble, however Apple alone in terms of market cap is bigger than the whole energy sector. He attributes this paradox to tech companies operating as monopolies and to the rise of passive investing, disproportionately favouring high index weighted stocks in terms of capital.
• Louis-Vincent believes the US-China trade war has evolved into a technological war. He points out that although there is now greater political alignment between China and the US (easing the resolution of trade disputes), their technological conflict will escalate.
• On the inflation front, he highlights that CPI and labour costs are trending up. In the presence of a higher energy price shock or a weaker dollar going forward, inflation could get triggered.
• Growth uptick in the emerging market, bearish dollar, gold suppliers consolidating (reduction in supply), and central banks becoming net buyers are all reasons to support the bullish gold thesis.
Why does this matter? Commodity prices have been subdued for one reason or another, especially soft commodities which have been 30-40% below their production cost in some cases. Irrespective of a higher dollar or not, a global inflation spike in 2020 could be a major curve ball, complicating the Fed’s and China’s monetary policy and leaving everyone confused. Additionally, the overvalued tech sector is also under risk of antitrust regulation and supply chain disruption from the technological conflict between China and the US.
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