☀️☕ Japan *wants* an inflationary wage price spiral

12 January 2023

Happy Daybeforefriday!

📊 In the Markets

• Climbing a Wall of Worry?; Brutal cuts at Goldman Sachs; Microsoft AI without OpenAI; A challenger to TikTok? Not Reels or Shorts... Channels!

📝 Focus

• Japan WANTS an inflationary wage-price spiral, Uniqlo hikes wages 40%

📊 In the Markets

Climbing a Wall of Worry?

Markets traded steadily higher throughout the day in US trading yesterday, buoyed, if you read most market commentators, by investors increasingly optimistic ahead of Thursday's US CPI inflation 🎓 report. Economists are expecting 6.5% growth year-on-year in December prices, a deceleration from 7.1% in November that could give the Fed, the US central bank, room to pull back further on its aggressive interest rate hikes.

Are investors really turning so optimistic attitude on zero new data, and in the face of recent comments by Fed officials reiterating that the Fed still needs to remain aggressive in raising rates (and holding them higher for longer) to fight inflation?

Top market strategists in our brand new "What's Priced-In for 2023" investor guide are almost all predicting a negative first half of 2023 for US shares, before some recovery in the second half. And Europe is looking even more bearish, The majority are expecting bonds to outperform while for some just sitting on cash would be even better.

Admittedly, we're only 7 trading days into 2023 (does it feel longer?) but so far:

US Treasuries ETF (GOVT) is up 2.1%

Investment grade bonds ETF (AGG) is up 2.7%

The US large cap S&P 500 is up 3.4%

And the pan-Europe STOXX600 is up 5%

What else has been priced into investor positioning and psychology coming into 2023? Are we "Climbing a Wall of Worry", as the old Wall Street saying goes?

This is when markets shouldn’t be climbing... but they still do. The idea that negative news or concerns may already be priced into the market, means that the market has already taken these factors into account and has adjusted the price of the market or a stock accordingly. This concept is closely related to the efficient market hypothesis which states that market prices rapidly incorporate all public information and knowledge about a market or a stock, making it hard for investors to consistently outperform by simply analyzing the information.

Brutal cuts at Goldman Sachs

​​Goldman Sachs started the process of culling 3,200 jobs last week, but the bulk of it was done yesterday, with investment bankers sacked globally. Many got fired without getting any bonus at all for their work last year, while some junior bankers were apparently given only 30 minutes to shove their belongings into cardboard boxes and get the heck out of the building in scenes reminiscent of the 2008 Lehman Crisis.

Refinitiv analysts calculate that as capital markets froze in 2022, investment banking fees dropped by 33% from 2021 and hit the lowest level in three years. Fees from equity markets were down 66%, from debt underwriting by 30% and from M&A by 24%. Global deal values came in at US$3.6 trillion, a 37% drop.

Goldman actually continued to dominate the M&A league tables, with a 31.6% market share, followed some way back by JP Morgan and Morgan Stanley, and then even further back by Citi and BofA.

Meanwhile, the world’s biggest asset manager, BlackRock, announced plans to cut 500 employees from its global workforce, or 2.5% of its staff, as last year’s market sell-off takes its toll on "the buy-side" of financial markets, too.

Microsoft AI without OpenAI

Recent tech excitement has focused on Microsoft incorporating Artificial Intelligence solutions from OpenAI, the developer of the groundbreaking AI-for-the-masses "ChatGPT", into its market-lagging Bing search engine and its market-leading suite of Office applications (Microsoft 365.)

An early investor, Microsoft is now said to be adding another US$10 billion to its original US$1 billion stake in the company, leading to breathless gushing by the commentariat and netizens alike, though it's actually less than a sixth of Microsoft's free cash flow last year. (FCF is the amount of actual cash left over from revenues after a company pays for its operating expenses, and before any spending on capital expenditure.) And today's 3% share price move, which of course doesn't mean anything in terms of cash available, added US$51 billion to Microsoft's market value.

Anyway...

Perhaps to show that its AI efforts don't start and stop at OpenAI, Microsoft unveiled the VALL-E language model, an AI voice simulator capable of accurately imitating a person’s voice after listening to them speak for just three seconds. It was trained using 60,000 hours of English speech from 7,000 different speakers, and I wish I was one of them. Researchers said "we find VALL-E could preserve the speaker’s emotion and acoustic environment.”

Check out the results here https://valle-demo.github.io/!

This should probably be regarded as "deep fake technology" so there is considerable potential for misuse, and the technology hasn't yet been released to the public. That said, Microsoft already has impressive Text-To-Speech (TTS) technology, and elements of VALL-E could be incorporated into it.

A challenger to TikTok? Not Reels or Shorts... Channels!

Tencent is back in the top ten most valuable listed companies in the world at a market capitalisation of US$464 billion after a 90% rally since October (putting it at #8, behind Visa and above UnitedHealth and Exxon.) And it's ramping up the focus on its short video platform, Channels, which is embedded in its popular super app WeChat in a challenge to Douyin, Bytedance's version of TikTok for mainland China, to reverse slowing growth in other businesses.

During WeChat's annual open class this week, Tencent said that Channels saw the total number of views expanding over 200% year-on-year in 2022, while video views based on AI recommendations increased by over 400%, though specific figures were not released.

Meanwhile, Guo Shuqing, the party secretary of the People's Bank of China, says the special campaign to rectify 14 internet platform companies' financial businesses is basically complete, with few remaining issues to resolve, bringing to a close China's more than two-year clampdown on its enormous, sprawling tech and internet sector.

📝 Focus

Japan WANTS an inflationary wage price spiral, Uniqlo hikes wages 40%

Fast Retailing (9983), Asia’s largest retailer of fast-fashion clothing with its Uniqlo brand, joins other major Japanese businesses like Nippon Life and Suntory in hiking wages and said it would raise the pay of staff in Japan by up to 40% from the beginning of March.

Just last week Japanese PM Fumio Kishida called on firms to hike wages to help citizens struggling with inflation, much of which is the result of rising import prices exacerbated by the weak Yen.

The cost of living crunch in Japan comes as salaries in the country remain flat even as inflation is going up at its fastest rate in decades, with core consumer prices up 3.7% in November, the fastest since 1981, and consumer prices in Tokyo in December hitting 4% for the first time since 1982. Raising wages by 3% or more annually is a core goal of PM Kishida's, while the Bank of Japan, the central bank, is targeting 2% inflation. The economy, measured by gross domestic product (GDP) unexpectedly fell by 1.2% in the three months to the end of September, but in fact, the world’s third-largest economy has stagnated for decades.

Along with huge export-led growth, a speculative asset bubble built up during the 1980s which burst spectacularly in 1990. This sent Japan's economy into a long period of deflation and stagnation known as "The Lost Decade" which has continued to the present day, so it's really been many lost decades. Since then, the Bank of Japan has tried to stimulate growth by getting consumers to spend more, but with little success because...

Once a deflationary mindset kicks in, consumers are inclined to reduce or delay discretionary spending in anticipation of future price declines, rather than bringing forward their purchases, which creates a negative demand and price feedback loop throughout the economy. Until now, Japanese companies, typically in a stronger position in wage negotiations with trade unions, have been reluctant to sacrifice profit margins by raising wages. This led to a 3.8% year-on-year fall in inflation-adjusted wages in November, its worst real-wage decline in more than eight years.

If you think inflation is bad, try deflation. But the Japanese economy is risking falling into "stagflation" if wages continue to fall behind inflation (even if low by 2022 Western standards.) Stagflation is a period of stagnant economic growth combined with high inflation 🎓, which undermines consumer purchasing power, which is basically the worst of all scenarios.