GS Mark Wilson July 31

FLAG series highlights non obvious floor content, Mark Wilson runs equity distribution and EU HF product, his weekly note reflects on the scale of the carnage... “The 40% sell-off in that market neutral momentum pair, eclipsing the last record extreme in factor rotation from March 2000” as well as looking at themes beyond Aug into the year end. Pls ask if you would like to be added. From Mark;

As much as the market this week has tied Warsh to the macro, and hyperscaler results to the micro – its important to recognise the bigger picture dynamic that markets are managing through :: we’re in the midst of a generational investment cycle and a never-seen-before demand for capital

There’s an excellent book by renowned VC investor & Union Square Ventures partner, Albert Wenger, called “The World After Capital”. Its a brilliant & thought provoking read & convincingly lays out a path to genuine abundance, facilitated & perpetuated by ongoing technology development and the delivery of an expanding knowledge economy, fuelled by zero marginal cost digital goods

However, to the surprise of many & in a genuine break with the history of recent decades which were characterised by a global savings glut & an abundance of capital, we now find ourselves in a regime (which may or may not be a pre-cursor to Wenger’s world of digital abundance) which is increasingly best characterised as one of the most capital hungry investment cycles in human history

The build out of AI is proving enormously capital consumptive (up-ending the business models & capital construct of swathes of the technology sector that has come to dominate global equity markets), but this is happening at a time of re-industrialisation, defense re-investment, power sector re-build, re-orienting supply chains under de-globalisation stress, and against a backdrop of sovereign demand for capital to cover rapidly increasing interest expense & spiralling welfare spend

As somebody else said this week : “AI may continue to intensify market volatility for years to come”, but – on top of that – this competition for capital is likely an enduring medium-term feature driving the pricing & cost of capital higher, which alters the investing paradigm versus recent history. In the cut & thrust of daily market action, this broader theme too often gets mis-diagnosed as a function of central banks, or energy prices, or short-term credit issuance – but is really part of a much larger (& newer) phenomena as the competition for capital intensifies, and as the micro AI story continues to dominate the macro

With that backdrop, here’s 4 specific points of focus, most of which are relevant & align alongside this broader theme :

1) The Fed this week were true to Warsh’s word – more limited guidance meant much greater uncertainty around the outcome ahead of (& coming out of) the meeting. As highlighted previously, the early days of a new Fed Chair can be tricky for markets (from 29th May : “of the 6 last Fed Chairs back to 1970, Bernanke & Yellen had a 10% drawdown each in their first year, the other 4 suffered a 20-36% drawdown during their first year”). In a week which saw plenty of geo- political volatility again, including a huge (intervention) move in JPY, US yields broke decisively higher. I subscribe to the view that the Fed are much more passenger than driver in this debate, but regardless – US 30yr yields broke out this week to levels not seen since pre-GFC (chart 1), and this is against a backdrop of surprisingly well contained G10 ex-US inflation, despite ongoing energy pressures (chart 2). Given the competition for capital described at the outset, don’t expect this breakout to imminently reverse.

2) This has been said over & over of late – but for those who are just tracking equity index headline performance, not much has been going on … But beneath the index, the moves have been historic.