A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
An endless tug-of-war rages between the prospects of profit and collapse. The notion of “stability” itself is perhaps a misnomer when it comes to macroeconomic markets, as what the term really describes is an ever-increasing tension between capital growth and economic devastation, fueled on by the expansion of currency volumes, market activity and human populations in a globalized world. In this quarter’s macroeconomics article, we take a closer look at how the profit motive is dangerously dominant in capital markets due to its inherence within human psychology, and how this plays out in concert with the opposing forces of monetary control, such as currency stimuli and interest rate changes, as enacted by central bankers and their governmental counterparts. While the unquenchable thirst for more dominates the day, balancing forces must be deployed strategically to keep the operational mechanisms of the status quo upright. The different ways in which trans-Pacific economies deal with inflationary and deflationary pressures find expression in the behavioral dialectic between investors/capitalists (with their quest for returns) and their host country’s central banks (with their quests for stability and manageable growth.)
The greatest threat to the integrity of the macroeconomic system is the inner drive of the capitalist, predominantly through the profit motive, which is constant and incessant, and to that very urge we must turn in order to seek our salvation.
Need. More. Cowbell.
“What do we want?”
“Gains!”
“When do we want ’em?”
“Always!”
Let’s not kid ourselves; the point of investing is the same the world over. All market economies have an investor/capitalist class that seeks to deploy their capital for the specific goal of attaining yet more capital. Without this investor class and the resources at their disposal, the modern world would probably have a few less centuries-worth of development than it currently has. Stuff costs money, and the people who’ve known how to focus and channel that money have produced the economic world around us; as has nobody else. In a very significant way, besides all the technological glories and mega-conglomerate glitz of modern life, humanity has capitalists to thank for this right foul situation we find ourselves in, and whether or not you interpret that with wealth inequality or environmental mismanagement terms, the statement stands. Nonetheless, here we are in the world we’ve got, and the psychological whims and quirks of the investor class are no less entrenched and no less significant to the markets and financial systems that hold everything together.
People are not logical machines. And despite what most investors claim, no, their picks do not beat the broader market. Investors are plagued by multiple behavioral irrationalities and cognitive biases, such as anchoring, optimism, regret, herding, and fear (to name a few). Generally, the average investor has poor market timing, and is the greatest contributor to their own losses. The desire for gains and fear of losses infect the mind of the trader and hamper decision-making, resulting in non-rational market behaviors at both specific and aggregate scales.
What does this mean for central banks, whose primary purpose is to steady the ship so the economy can weather the storm without upheaval, bank runs, excessive volatility (which terrorizes consumer pricing), supply or demand shocks, or runaway inflation or deflation? It means that central bankers must choose their words very, very carefully. The profit-thirst is relentless, and capital managers, investors and traders are rabid scrutinizers of market-affecting announcements, with their fingers ever on the trigger, poised to redirect capital instantly with the click of a mouse. The investor/capitalist class is not participating in the markets for the good of the community. They are not allocating funds in order to empower certain companies to fulfil maximum employment and keep other peoples’ families well provided for. They are not opting to accept losses so that bond prices can recover, or so that another nation’s currency isn’t overly weakened. They are not making sure to choose the investments that most advantage their central bank or Treasury’s ability to conduct business, or keep governmental policy balanced or afloat. Gains. It’s all about the gains.
“But, what about the-“
“No. It’s gains.
That’s. The. Point.”
An investor who makes choices to reduce their personal level of gains, now, or in the future, is making poor investment choices. Perhaps such choices might be desirable in terms of their other activism-related impacts, but their investment value is often low, or negative, and frequently results in the loss of capital, which is to say the loss of that capital’s power.
As we can see, the profit motive is not entirely separable from the will to power. Major decisions from central bank figures that alter the macroeconomic environment are guaranteed to be scrutinized and reacted to by the investor/capitalist class in more power-compelled and dramatic ways than the average consumer, who takes no active personal role in their investment direction. Fed Chair Jay Powell is not tiptoeing around the violent, kneejerk reactivity of Joe and Jane Everyperson when he tries to temper expectations about future interest rate adjustments; he is trying to pacify the capitalists so they don’t do anything rash and cause volatility to the financial system. He is speaking very indirectly to their will to power, to their irrational cognitive biases, and to the dialectic between their greed and fear, all while trying not to give away anything either too concrete, or too flimsy, either notion of which could be misconstrued and snowball into some cataclysmic extreme in a matter of moments. He is trying to convince them not to panic, there is more cowbell to come, and if you behave orderly and predictably, you might even get more than your share.
Thusly do the investor-capitalists, seemingly microeconomic participants, have a decided impact on the macroeconomic environment: macroeconomic policy and delivery are tailored specifically for the investor/capitalist class and the notably human and irrational reactions they have to verbal information. Each of the trans-Pacific economies we cover in the TPDEARR is large enough to have equity markets accessible to a domestic investor/capitalist class, and each of them is subject to the curse of more cowbell from said participants. Macroeconomic parameters are not “set by authority”, they are continually re-negotiated by the legal authorities of currency management (usually a central bank) and the investor-capitalists whose financial resources systemically underlie economic activity. This negotiation is nuanced and highly subjective, in contradiction to the limitless volume of “objective” mathematical reasoning used to found corporate and governmental policy; capital allocation decisions are routinely made according to degrees of uncertainty with no guarantees and an endless host of cognitive biases clouding judgement. But enough of this “logic”… there was talk of more cowbell…?
I’m Not Teetering on the Brink, You Are!
A runner takes the highest trail to the very top of a ridge. Up along the spine of the mountain, she quickens her pace on the rugged trail, the whole of the world falling away and into the majestic distance around her. We, “society”, view her from afar as she climbs ever higher, and the cliffs beneath her grow ever steeper. As the stakes grow, her path often narrows and becomes more precarious. At other sections, it broadens a bit, and she, and we, can all breathe easier for a moment. But she dare not stop, or even slow too much, as so much of her balance is coordinated with her forward speed and momentum. Obviously, going in reverse would be disastrous. Guess who the runner is? Guess what happens if she falls?
Every economy can be seen as a multi-dimensional, infinite-armed agent in motion. And “heights” of “quality of life” are always to be compelled by an eager populous, especially if it’s experiencing strengthening of buying power and expansions of access to services and global commerce. “Balance” is the notion of relative stability as represented in the economy, and capital is the lifeblood of the economic organism. “Healthy capitalism” is the existence of an ongoing, mutually-beneficial relationship between the economy/organism and the capitalist class, who constitute the environment which surrounds and interacts with the organism via its lifeblood: capital. Any activity that utilizes capital is capitalistic to a degree, and bestows upon its human perpetuators the honor of capitalist, to a degree. All currency-based economic arrangements are founded on exchanges of capital for resources and services and fundamentally include the capitalist class. We would be naive to omit them from our macroeconomic analysis. If the central bank is the one trying to widen and flatten the trail ahead of her, guess who is the wind that whips across the mountainside?
In the preceding analogy, we must reason that stability and progress in an economy can only persist if the contributing capitalist class has a healthy relationship with the “organism”. The way that an economy’s capitalism-as-usual operates can only persist stably if neither of the two participants in the dyad is trying to “bleed the other dry of their capital”. Please pardon the graphic nature of the description, but it actually is that serious. For one example, as discussed in the DEC.23 Natural Elements article, modern society is supported by pillars of industry that have expanded the amount of immediately-available nutrition on Earth, and which we now require to feed and distribute life-enabling goods and services to billions. These pillars are cornerstones of capitalism in the global economy. They run on capital. They are run by capitalists, within either public, private or state institutions. And they are necessary for civilization as it currently exists. Collapse of capitalism itself is equal to collapse of society. Our species’ subsistence on this planet is always teetering on the brink. The runner cannot stop running, the trail climbs ever higher, and the climate conditions are less certain with every step. The capitalist class can make things easier, or not. Central bankers in each economy face the challenge of dancing with their counterposing capitalists, trying to stay in balance, all the while ensuring that capital gains are allowed enough to sufficiently motivate the capitalist class to continue their participation and behave responsibly. Macroeconomics, ladies and gentlemen.
Since everything depends on stability for continuity, a fair amount of research has been done towards reducing macroeconomic volatility. One particularly notable study highlights pre-pandemic economic growth in 20 Asian countries and strongly recommends the liberalization of trade openness to “accelerate long-run economic growth and exchange rate stability.” In order to teeter less (macroeconomically), increase and improve trading relations with economic neighbors, both near and far. Competition, which grows inherently with cross-border openness, also boosts innovation in domestic sectors. Conclusions from the study are broad, so individual scrutiny will certainly bear out more information about particular macroeconomic environments, but the principles are sound. Why else would the leaders of the two poles (US, PRC) be going on their current World Handshaking Tours trying to drum up bilateral and multilateral support? When “we” work together, “we” are stronger. This is pretty much true.
Now, since llm-trained chatbots can trace and reproduce information so rapidly, there’s no sense in doing the same here regarding current health statistics of Asian and North American banks. Suffice it to say that one notable aspect currently influencing the capitalists’ attention, other than evolutions at the Fed, is that Chinese banks are improving their asset base far more than other Asian financial institutions. GDP per capita in mainland China is still about half of that in Japan or South Korea, about a third of the same in Taiwan, and about a sixth of the level in Singapore. So in terms of average quality of life in the PRC, there are stages of advanced economic development still yet to unfurl; it’s no surprise it’s banks are absorbing a lot of newly available liquidity, and surely everyone will keep watching to see as to whether those assets are productively used for society or not. Nonetheless, this type of growth contributes to the appeal of accessing the economy for investors. The big 4 banks in China are the largest in the world, larger even then the US megabanks of JP Morgan and Bank of America, and the vast majority of their value is in domestic loans, not volatile securities.
The state-owned nature of banking business in China lends it a kind of backstop unavailable in the “freer” public-private markets of more democratic economies. Does it make them less nimble? Unclear. But it does better help them compete against the strength and ubiquity of the USD, which still does and will continue to provide the US economy with a type of stability unparalleled globally; so it definitely helps the Chinese yuan teeter less. Investments in China can still find strong macroeconomic footing, helping to make [DEC.23 Squad Asset #1] a strong pick in the DEC.23 Squad.
Mutually Assured Destruction?
If macroeconomics is the study of the overarching financial apparatus that makes modern commerce possible, macroeconomic collapse also means collapse of modern life. A lot of people still don’t seem to understand this, or why Big Bad Government “bailing out” certain banks is always an option, particularly in the case of the US, the economic collapse of which would rip down the primary currency apparatus of the entire Western World.
Next time you buy something, in that moment before paying, imagine what you would otherwise have to trade for that thing, or swap, in terms of value, if currency didn’t exist. Despite how much you might despise the idea of a greedy banker, rest assured of the reality of your own destruction should the bankers fail in their quest for macroeconomic stability. They are not your enemy.
And to the bankers: we hope you increasingly recognize the significance of consideration of Natural Elements, as the capitalists are doing. The capitalist class’s contributions of more than USD$30 Trillion to annual sustainable investment assets under management (roughly 1/4 of the global total) indicate a rising trend which contributes to our support of [DEC.23 Squad Asset #3]. If environmental reasoning underpins a greater and greater base of investor activity (= CAPITAL FLOW), central bank policy must also consider it, and increases in its influence, in both forward guidance as well as technical analysis.
Additional Notes
To catch and direct the capitalist’s capital flows, make the most utilitarian and desirable course of her capital flow profitable for her. The more predictable and stable are her flow of gains, the more she will direct her capital towards those aims, providing funding and liquidity to a broad swath of economic participants and stabilizing the macroeconomic playing field. We cannot move on, despite what many seem to want, without the capitalist class leading the way. So be one; and lead.
tkscm, limited 