"The mood among the world's financial elite as they gathered in the mountain resort of Davos, Switzerland, is typically a useful investment indicator: However they feel, do the opposite.
Not so much this year. The bankers, executives and politicians were more optimistic, but only relative to how pessimistic they were feeling a few months ago. They are also puzzled by the same uncertainties that trouble investors.
"There's relative optimism, but I would call it more a sense of relief from what was supposed to be a disaster and instead might only be a mild recession," said Stefano Aversa, vice chair of management consulting firm AlixPartners.
A contrarian would say that the mildly upbeat mood is a sign that the rally of about 10% in the S&P 500 since September is no more than a bear-market bounce that won't last. The accompanying drop in the 10-year Treasury yield took it from a peak of 4.2% in October to below 3.4%, giving a huge boost in confidence to those concerned about the rising cost of debt.
But markets should reflect the fact that the worst fears of the autumn haven't materialized. Back then, the three big concerns were runaway inflation, energy shortages in Europe and China's pandemic isolation. The U.S. inflation rate has dropped rapidly, the mild winter left Europe flush with natural gas and China has shocked the world with its surprise reopening. In investor cliche, the market climbed the wall of worry.
Amid the improved mood there are two remaining big worries for the year, either of which could cause the bear market to reassert itself.
The first is the downside of China's reopening. A better-functioning China is clearly good news for economic growth both in the country and among its trading partners.
But it also means China will consume lots more energy, which ought to push up the price of oil and the internationally traded liquefied natural gas that Europe is now relying on, and so add to inflation.
There has been a small rise in oil prices since the reopening, but they remain lower than they were even a few days before the country ditched its rules early last month.
"It's odd," said Jose Vinals, chairman of emerging-market-focused bank Standard Chartered. "My own hunch is that we're going to move to higher oil prices. It's not going to be major but it's going to be significant."
Some of the other demand from a reopened China will also add to inflation elsewhere, which would be bad news for markets. There should be some offset from removing the remaining pressure on supply chains once the short-term Covid-19 crisis is over, but it is hard to see how it could be big enough to counter the additional demand, especially for energy.
The second worry is that the market is overly confident that the Federal Reserve will pivot to lower rates later this year as inflation cools -- even though the central bank keeps saying rates will stay high until 2024.
"The Fed is trying to convince the markets of something and the markets seem to read over that," said Charles Emond, president and chief executive officer of Caisse de depot et placement du Quebec, which invests pension-fund money in the province. "The Fed has no incentive to bring rates back down early."
Thomas Buberl, CEO of insurance giant AXA, says there is more trouble coming as companies refinance their debt at higher cost after the rapid rate rises of the past year. "You will see leverage fallout and you will see liquidity fallout," he said. "That's why I think 2023 will not be an easy year."
I'm inclined to go with the contrarians against the rebound in markets, which won't surprise regular readers, as I remain concerned about inflation. But I have to acknowledge that important things have gone right in the past few months. As worries are resolved, prices ought to rise, and that is exactly what has happened.
Ultimately, the mood in Davos reflects the reality of markets, which aren't super-bullish and aren't super-bearish. That's good, because it means things are closer to being properly priced than they are at extremes. But it's also confusing." [1]
In Lithuania, technology is primitive and consumes a lot of expensive energy. China's induced energy price hike will hit us the hardest. Since Landsbergis has undermined our exports to China, we will not benefit from the boom in trade in China, unlike the rest of Europe, which wisely did not follow Landsbergis' lead.
1. Streetwise: The Year Begins With the Ultimate Contrarian Indicator
Mackintosh, James. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 23 Jan 2023: B.9.
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