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The world's most powerful banker, Jamie Diamond, CEO of JP Morgan, recently said that before every crash, the markets felt particularly good. What are we currently experiencing? Stock markets are at an all-time high, and the crypto market is rally surging with Bitcoin above $58,000. The markets are behaving as if interest rates were at zero and central banks were massively injecting liquidity into the system.
Actually, the opposite is true. Expectations and hopes for interest rate cuts have been increasingly suppressed. Now there's even the possibility that interest rates might not fall at all before the US election. Nevertheless, the markets are having a party, and we want to examine the gap between this party and reality— the reality on the ground, so to speak.
This is n't about predicting a crash or saying there will be one, but I want to show how far removed the fundamental reality is from the financial markets. It's about how the whole thing no longer fits together, and there is, of course, a certain, cautiously worded, potential for a pullback. This doesn't mean that the markets can't continue to rise and the euphoria can't increase further.
We've already seen that in the... Looking at the past, here's another statement from Jamie Diamond: before a crash, it feels particularly good, referring to 1972, which also felt great, but then suddenly things change. Let's look at current expectations: interest rates will fall, but at the same time, a really great economy is expected to remain.
This is shown by the survey of large and small investors; most expect a wonderful landing, see signs of hope that things will also improve in the commercial sector, etc., etc. And as Bank of America writes, new all-time highs are not a sell signal; usually, quite the opposite. Most of the time, such all-time highs are even buy signals.
Below, we see a chart from San Hendrick showing the S&P 500 at the top and then the gap earnings, i.e., how much these earnings increase or decrease. We see that we have an increase in these gap earnings, but of course, not nearly to the same extent as the share prices have risen. This means that the gap between what companies actually earn and their share price development has grown ever wider.
This is called multiple expansion. This means that valuations have simply become ever higher. In other words, the shares have become ever more expensive, and so everyone is... San Hendrick also firmly here, left chart: the markets are behaving as if we had zero interest rates and quantitative easing, meaning liquidity would be pumped into the system.
No, that's not how it is. When interest rates were at zero and the Fed was doing quantitative easing, we had at least occasional volatility, even pullbacks in the stock markets. During a two-way price discovery, so not a one-way street as far as prices are concerned, here we see this massive increase in the S&P 500.
This is happening during a period when we are normally seasonally weak, when a sitting president is running for re-election. This is usually the second half of February or the first half of March, actually a very weak period. None of that is the case so far, but as I said, we are seeing a euphoric reaction compared to when the Fed lowered interest rates to zero and did quantitative easing on a large scale.
And where does this come from now? Through the so-called easing of financial conditions, as we see here. The index here on financial conditions from Gopens SAX now shows one of the largest relaxations since this index has been calculated, namely since 1982. This, in turn, is also a consequence of the stock market rises.
Below, on the left, we see Paul and Arthur Burns, that fat president who cut interest rates too early and underestimated the risk of inflation. You ca n't blame Jeron Paul for that; Paul is already more like Paul Volker, the fat central bank chief who massively raised interest rates, while Janet Yellen is acting more like Arthur Burns.
Janet knows about the excessive debt, and therefore interest rates actually need to come down. But how do you want to lower interest rates now, given this euphoria? You'll just create even more euphoria, even more demand, and things will spiral further out of control. Just what happened here with the easing of financial conditions— here's an analysis from BNP Paribas— caused about 100 basis points of interest rate cuts, or has the effect of a 1% interest rate cut.
So, in fact, interest rates are no longer above 5%, but only just over 4% due to the easing of financial conditions. And we immediately see how this flows into the real economy, visible in the... House prices here, Case Schiller House Price Index, here we see the data from December, which have accelerated again.
House prices have risen by 5.5%, a direct consequence of the falling mortgage rates, which had temporarily fallen significantly below 7%. This suddenly triggers new demand, which in turn drives prices up. So we see further inflation of asset prices in the real estate sector, in residential real estate, and in the stock market.
Asset prices are inflating further. On the other hand, we see other sectors that are suffering massively from these high interest rates, such as the building sector. Yesterday, a 26-story Manhattan office commercial property was sold for $1. A Canadian pension fund that had already invested many millions sold its share, namely 29%, for $1—practically giving it away because it's worthless.
Here we see the other side of the coin, between euphoria and, if you will, a crash, because here we are seeing truly crashing real estate prices in the commercial real estate sector. And if we look again at the Looking at interest rate expectations, we now see only a 38% chance of four interest rate cuts.
Just a month ago, we had over a 50% chance of at least one cut. So, March is practically ruled out, as is May 1st. There's an 80% probability that interest rates will remain the same, with the first rate cut only expected on June 12th. We've seen a very large shift from the expectation that interest rates might even fall seven months to now only three.
And this is happening in a situation where the US could certainly use lower interest rates due to the heavy burden these interest payments place on the US budget. Toren Swock from Apollo has shown that the US is becoming more and more like Italy. While Italy still has higher interest payments relative to its GDP than the US, this will even out in the coming years.
They will then be practically on par in terms of interest burden relative to economic output. And let's look at the fact that the Americans alone will borrow $11.5 trillion in new funds in 2024. This is about long-term bonds, meaning bonds with longer maturities. That's more than 50% of what was the case before Corona.
39% of all long-term bonds in the world are US Treasury bonds. The Chinese, in turn, will overtake the Japanese as number 2 with 1.7 trillion. That's just over a tenth of what the Americans have. That shows the scale. Accordingly, one would actually need falling interest rates, but we also see this interest rate expectation in this graph; it's declining.
And why is the interest rate expectation declining? Firstly, the economic data was mostly better recently, but mainly because inflation has risen again, and that is likely to continue for a while. Almost 40% of smaller companies say, yes, we are planning to raise prices in the near future. Three months ago, it was only 20%, so about half.
We get the PCE consumer price index for January tomorrow. Since the CPI and producer prices were already higher, it probably won't be any higher, so that wouldn't be a big surprise. And today we get the GDP figures, I'm taking from... The fourth quarter, this is the second release, and the PCE core rate is always particularly interesting – the PCE prices, so the inflation component, if you will, in this GDP calculation.
Here we see how recently 4.9% and 3.3% of GDP were calculated. That was also the last calculation, here 3.3% in the first release. So we see that growth is quite different from that in Europe. Nevertheless, we see that recently, or more precisely in recent days, the data from the US has weakened somewhat, and the US Economic Surprise Index has fallen again.
However, we also see that, for example, junk bonds, or "junk bonds," the risk is priced as low as it has been for years compared to normal corporate bonds, or rather, creditworthy corporate bonds. This means that investors see practically no risk, while we then see things like the commercial real estate sector.
And yesterday, there was also interesting news from the Conference Board, which massively revised its February figures downwards. This shows that something must have happened here; we do n't know exactly what happened. But, as so often lately, the data is being revised downwards. A Twitter user named Hato asked, "Yes, how can you revise that downwards?" Then ask the people who previously answered this and that: "Have you reconsidered in the meantime?" "Um, I don't think that was exactly what you felt back then," so revise your opinion.
This is all very, very strange here at this Conference Board, the Consumer Conference, which was significantly weaker than expected yesterday. But that doesn't matter because the markets are euphoric about AI. And, uh, here's this statement from former Google CEO Eric Schmidt, who said everyone will be twice as productive.
Interestingly, here's a tweet that says, "Three months ago, if you started a query on Chatgpt, about three out of ten queries were, according to the algorithm, 'That would violate our content policy.'" So, that contradicts our guidelines, so to speak. Now it's seven out of ten. That means we're seeing this limitation of possibilities, if you will.
Here we see the graph again showing that new technologies are usually overestimated in the short term, then comes the disappointment, then they're underestimated, and then the true potential shows. Now we see these problems that Google has here. A headline from Blomberg: "Google left and terrible blind by pulling AI future after right-wing backlash." After Google managed, for example, to make soldiers look only Black or Asian, and Vikings and Swedish women all Black or at least Asian, supposedly from this woke approach of not discriminating against anyone, they desperately want to avoid racism and in doing so become racist themselves by allowing the AI to no longer show white or light-skinned people.
It 's so incredibly absurd. Accordingly, one shouldn't only get upset if one is right-wing, or rather, very right-leaning. I believe this is simply a new kind of must that must be condemned just as much, whether one is more left-liberal or right-wing conservative; it's a form of racism. And then to say here, "Well, right-wingers would get upset about it." Elon Musk already summed it up perfectly: what Jiminy did with Google's AI is insanely racist and sexist, and many are really quite annoyed by it.
Incidentally, we're now seeing in the tech sector that, as Bank of America shows, we've now experienced five weeks of money outflows. The tech sector has seen its longest trajectory since June 2022. Tech flows are the most negative since June 2021. Especially HCHP, which was heavily invested before the Nvidia figures, has since exited massively.
We're currently seeing this on the stock market – well, sort of a sideways movement; it's not going up, it's not going down properly. Now we have the news that Apple is abandoning its electric car plans. They spent 16 years on this and invested billions. The team that worked on these electric vehicles is now supposed to focus on AI.
So, if you can't build a car, you make money, you do AI – that always works. This alone is worth 60 billion in market capitalization. One would say that they actually wanted to sell this car for at least €100,000 or $100,000, but Apple then said, well, the margin would be relatively low. Below, by the way, we see the ISARES clean energy ETF, which is practically the next setback for electromobility, one could say.
And since the beginning of 2023, things have only been going downhill for these alternative energies. Currently, there's a lot of euphoria surrounding Bitcoin. We're seeing this massive surge. Now, Charles Gasperino from Fox says, "Okay, the White House is concerned that further increases in electricity consumption could endanger the power grid in the US." The crypto scene, in turn, says, "Well, that's probably being used as an excuse to increase regulations." Nevertheless, we see a crypto rally this morning, with Bitcoin over 58,000.
On the other hand, we see massive bearish divergences and, at the same time, extremely bullish sentiment. So, we see the euphoria starting, and at the same time, the risk increasing. If we now turn to Germany, for example, unlike in the US, price expectations have fallen further—by 15 points, as the EO says, after 18.8 in January.
Inflation is likely to fall faster in Europe simply because the economy is significantly weaker. And here are my two recommendations regarding interest rates. It's possible that the FER wo n't lower interest rates before November. What exactly can be expected, and how will the FER act? There are certain patterns that are highly interesting, which are included in this article.
The first recommendation is... Second recommendation: Apple vs. Tesla. The iCard foam has obviously been abandoned by Apple. Apple and Tesla are by far the two weakest candidates from the Magnificent Seven, so here are two losers who continue to lose, if you will. Here, if you will, Apple has also lost.
I would like to give you these two recommendations: yesterday's webinar with Mark Friedrich, which I really enjoyed, or rather, which I found quite lively. I think you might agree. I hope that we can put it online today. At the latest tomorrow, we will also present this lively conversation with Mark Friedrich in the financial market world, etc.
I will also mention it again here or in the video with a link. So, first of all, these two links that you will find below the video. And now I wish you all the best and say goodbye.
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