03 January 2023
🥂💥🍾Happy New Year! We wish you all a wonderful and healthy 2023 ahead!
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US large-cap S&P 500 closed 0.47% UP ▲ Tech-heavy Nasdaq Composite closed 0.10% DOWN 🔻Pan European STOXX Europe 600 closed 0.23% UP ▲ HK’s Hang Seng Index closed 0.52% UP ▲Japan’s Nikkei 225 closed 1.56% DOWN 🔻
Index levels since our last edition on the morning of Friday, 23rd December to the last closing prices overnight (only some European markets were open on Monday, in quiet trading.)
📊 IN THE MARKETS
A wild year
Red-hot Retiree Labour MarketTesla + Twitter = Musk the first person to lose US$200 billion everNew Words for 2023: Epicaricacy and Freudenfreude (rich crypto folks losing billions)Apple supply chain vs China lockdown and reopening chaos, geopoliticsChina’s path from Covid zero to Covid not-very-zero-at-all
📖 MoneyFitt EXPLAINS
🎓 Interest Rates
📊 IN THE MARKETS
Well, that was a pretty wild year in the markets, coming after three strong up-years, even including through the start of a once-in-a-lifetime global pandemic. The year saw Russia’s invasion of Ukraine, surging inflation, the Federal Reserve hiking interest rates 🎓 for the first time since 2018 and the US Dollar following suit, causing great distress almost everywhere else. All that and energy crises, the tech mega-cap plunge, striking workers, the crypto winter (and worse), the dumbest mini-budget in history, China’s abrupt zero-Covid pivot, AI for the masses and endless Muskness.
Reports toward the end of the year were mixed, but suggest that sharply higher US interest rates have not yet cooled the economy enough to bring inflation down enough. Faith is a bit low in the Fed after its sluggish response to early signs of inflation, hence worries that the Fed will raise interest rates too high and hold them there for too long, which could then tip the economy into an ugly recession (or worse), which is the main worry of investors heading into 2023.
Wall Street closed out the year last Friday with its worst yearly performance since the financial crisis in 2008. The benchmark S&P 500 and tech-heavy Nasdaq fell 19% and 33% in 2022. The MSCI All-Country World Index of stocks also lost about a fifth of its value during the year, for its largest drop since 2008 (when it collapsed 43%.) The Pan-European STOXX600 Index (which includes the UK and Euro as well as non-Euro-zone markets) ended the year down about 12% despite a 10% final quarter rally. Bizarrely (to some) the UK’s FTSE 100 actually posted a small gain, on its export focus, big energy companies and war beneficiary defence firm BAE Systems (alongside Sterling’s worst year since 2016 vs. the US Dollar, with “Cable” dropping more than 10%.)
The HK/China Hang Seng Index dropped 15% for the year (despite a 33% China-reopening-rally in the last couple of months, despite concerning healthcare news flow), though its tech index was still down double that for the year, reflecting both global monetary tightening as well as heightened geopolitical tensions between China and the US. China’s blue-chip CSI 300 index fell almost exactly half way between, at -22%. Japan’s benchmark blue-chip N225 closed a similar 11% down, but that includes a 7% drop the last two weeks alone as markets digest the prospect of a pivot to higher rates even as the rest of the developed economies decide when to plateau and perhaps pivot the other way.
The dollar, a beneficiary of aggressively rising US interest rates as well as its “safe haven” status in volatile times, gained 7.8% over the year (based on the outdated, trade-weighted DXY Index) , its biggest annual increase since 2015, even after a drop of 7.7% in the last quarter alone… its biggest quarterly decline since the third quarter of 2010.
Red-hot Retiree Labour Market
One of the reasons the US labour market remains red-hot three years into the pandemic job market rebound is that older workers are leaving the job market and staying out, rather than delaying retirement and earning extra cash.
That contributes to the labour shortage that the Fed thinks may be keeping wages and inflation stubbornly elevated. The sleepless night risk for the Fed is that inflationary expectations will be baked into wage negotiations and lead to a wage-price spiral that will be increasingly hard to break. That would force the Fed to raise interest rates higher than higher, which would raise risks of a recession.
Of the 3.5 million people “missing” from the labour force, 2 million have simply retired. Unemployment at 3.7% last November stayed close to September’s 29-month low of 3.5%, compared for an average of 5.7% from 1948 until 2022.
Tesla + Twitter = Musk the first person to lose US$200 billion ever
The Tesla share price dropped over 70% in 2022, more than half of that in December. Exactly 12 months ago, the market capitalisation of the company (the value in the market, based on the number of shares times the last done share price) peaked at a massive US$1.2 trillion, greater than the combined value of Toyota, Volkswagen, Mercedes-Benz, GM and Ford. Tesla’s earnings over the last 12 months came to about 1/7th of those companies. After the drop this year, the market cap of Tesla is now just US$389 billion – still comfortably the highest-valued carmaker in the world, but now just the combined market value of the next three largest, Toyota, BYD (of China) and Porsche (a recent IPO) with earnings less than half that of Toyota alone.
Last week, it fell out of the S&P 500 Index’s top 10 companies on a plan to temporarily halt production at its Shanghai factory and a poor delivery outlook from Chinese EV rival Nio, following news the previous week doubling discounts in the US on two of Tesla’s highest-volume models.
Now Reuters reports that the bubble in used Tesla is popping, with prices falling faster than those of other carmakers. This is a threat to new car prices as Tesla had raised prices sharply on demand in the second-hand market so strong that used cars were being flipped at a profit (with proceeds then used to order a new Tesla!)
After the pandemic stimulus trading euphoria (including playing its inclusion into the S&P500) among institutional investors and Musk fanboys alike that saw Tesla shares rally from under $30 to over $400, the company is facing increased competition from legacy carmakers as well as other electric vehicle makers. And of course, not helping the Tesla situation is CEO Musk’s distraction at Twitter including selling close to US$40 billion of Tesla stock in big, unexpected chunks despite promises to the contrary (the most recent being that he won’t sell any more until 2024 or later.).
As a result of this, and not counting any overpaying or value vaporisation at Twitter, Elon Musk has become the first person ever to lose US$200 billion from his net worth, according to a Bloomberg report. Musk’s fortune peaked in November 2021 at US$340 billion and was the world’s richest person for a year before being toppled by French luxury giant LVMH’s CEO Bernard Arnault. But Musk is still worth US$137 billion, so he’s doing just fine.
New Words for 2023: Epicaricacy and Freudenfreude (rich crypto folks losing billions)
“Epicaricacy” means getting pleasure from the misfortune of others (like the German “Schadenfreude”) which is what some people feel seeing reports of how 17 of the wealthiest investors and founders in crypto have lost a total US$116 billion in personal wealth since March, according to Forbes. Ten of those losers aren’t even billionaires anymore!
(Perhaps healthier might be a touch of “freudenfreude” instead, finding pleasure in another person’s good fortune or success, even if it doesn’t directly benefit us.)
Apple supply chain vs China lockdown and reopening chaos, geopolitics
Recent months have shown how vulnerable Apple’s business is from a supply chain perspective. Now, as a result of China’s massive wave of Covid infections, supply chain experts are warning of potential months-long disruption to Apple’s iPhone production. This comes after the chaos at its main contract manufacturer Foxconn’s mega factory in Zhengzhou (known as “iPhone City”, the largest in the world.)
Foxconn and its rivals Pegatron and Wistron, all of whom are from Taiwan, have been expanding their Indian operations to cater for Apple’s need to diversify its supply chain. Currently only 7-8 % of iPhones are being assembled in India, but that could hit 18% by 2024. That said, it’s not a panicky reactive move from Apple: China was the primary location of 44% to 47% of its suppliers’ production sites, but that fell to 41% in 2020, and 36% in 2021. Apple also plans to move some MacBook production to Vietnam for the first time next year, once again using its top supplier, Foxconn, to start as early as May this year.
Worth more than a footnote on an Apple Focus story: TSMC in talks with suppliers over its first European plant, which will be in Dresden in Germany, and focused on the automotive sector. This follows the expansion of plans for its massive plant in Arizona.
China’s path from Covid zero to Covid not-very-zero-at-all
What to watch for in China is whether the fear of getting infected in post zero-Covid China is greater than the fear of being suddenly and brutally locked down. If it is, that may suppress domestic consumption and prevent the domestic economy from growing enough to offset the global slowdown in 2023.
Some of China’s reopening headlines from the last week.
– 250 million people or 18% of the whole population of China was infected in just the first 20 days of December after the abrupt removal of zero-Covid policies
– 37 million people were infected last Tuesday alone, with Beijing hospitals overwhelmed by sick elderly Covid-19 patients
– Worries are growing that a dangerous new virus variant could emerge from the biggest Covid-19 outbreak ever seen and threaten the whole world
– More than 5,000 daily Covid-19 deaths in China according to UK-based health data firm Airfinity. Traders still want to make money: China’s biggest cemetery and funeral service operator, Fu Shou Yuan International (1448), has been soaring, with a 70% run over just the last two months
– International borders to open on Jan. 8 with inbound passengers only needing a negative test result within 48 hours of boarding. Part of a wider announcement that downgraded the country’s management of Covid-19
– Hong Kong dropped almost all remaining Covid-19 restrictions including compulsory testing for arrivals.
– Following Italy’s lead, the US and some Asian countries, including Japan and India, will require negative tests for air passengers travelling from China. Over half of arrivals in Italy were infected (though not with dangerous variants)
– But the rest of the EU decided not to follow — the passport-free European Schengen zone then makes Italy’s controls meaningless.)
– China’s elite and businessmen are giving Paxlovid to business associates as demand soars and supplies run short. (Pfizer’s antiviral drug Paxlovid is the only foreign Covid medication approved for use in China and in the West is generally prescribed to treat mild to moderate Covid cases)
– Mainland Chinese are flocking to Macau to get mRNA vaccines rather than domestic jabs
– Scientists say infection wave has likely crested in Beijing, Shanghai, Chongqing and Guangzhou, but rural cases will spike in mid-January as migrants travel home for Chinese New Year.
Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.
📖 MoneyFitt EXPLAINS
🎓 Interest Rates
The interest rate is the price of money over a given period of timeWhen you deposit your money, you are effectively lending it to the bank, and you earn interest on that money. If you leave the deposit alone, the interest you get will also earn interest, which itself will earn more interest, which is 🔮magic (also known as “compounding.”)When you borrow money, whether borrowing from a bank or issuing a company bond to investors, you need to pay it back with interest. And compounding can work its magic the other way, where what you owe gets bigger and bigger.Central banks set the level of rates to influence economic activity and control inflation.The higher the interest rate, the more expensive it is for businesses to grow, while consumers pay more interest on their loans, spend less and try to save more. With less demand, domestic price and wage pressures are less, BUT the economy will grow more slowly or may even shrink.High or rising interest rates can also lead to a stronger currency if other countries’ rates are relatively lower, which can translate into lower prices for imports. Unfortunately, that also means lower exports because of less competitive (higher) prices.The reverse happens with low or falling interest rates.
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