Topic #1: Cautious Optimism
Current fear-greed index in the past week is at a high since the start of 2023. Yet, inflation is not as simple as it appears and thinking that it will swiftly return to normal levels is a perilous misconception. Despite starting to decrease from its all-time highs, it may still take longer than expected to reach the normal range of 2% to 3%. There are three primary reasons for this prolonged high inflation and the impact it could have on your portfolio.
- China’s Reopening could Escalate Global Inflation
China’s lifting of Covid restrictions is providing a boost to the world’s economy, but it could also result in higher global inflation while central banks are struggling to contain it. As per the research group, Bloomberg Economics, China’s economy could grow to 5.8% this year, which could increase global inflation by close to 1% in the final quarter of 2023. If China’s economy performs better and grows to 6.7%, the increase in global inflation could reach 2%.
- Strong Real Income Growth leading to Spiraling Inflation
Despite the recent job losses in the tech industry, the US job market remains robust. The US economy added 517,000 new jobs in January and the unemployment rate fell to a 53-year low, which has led to better wages. Real hourly earnings, adjusted for inflation, are finally rising again. However, higher incomes lead to an increase in spending, consumer prices, and ultimately spiraling inflation. Companies will also raise their prices to offset their higher wage costs, leading to further inflationary pressure.
- High Inflation’s Stickiness
Historically, once inflation rises, it takes a long time to decrease. The last time US inflation was in double digits was in the 1970s and 1980s, and it took over six years for the Federal Reserve to bring it down to its target of 2%. A study by Research Affiliates found that once inflation crosses above 8%, it usually takes 6 to 20 years to fall back below 3%, with a median of over 10 years.
These factors could make it challenging for the Federal Reserve to pause its rate-hiking cycle, resulting in higher interest rates that peak higher and remain elevated for longer than expected. Currently, investors expect the Fed to raise rates to 5.1% in July and begin cutting them to 4.8% by the end of 2023. However, if the Fed raises rates to 5.5% and keeps them there for the rest of the year, it could come as a surprise to investors. These elevated interest rates could result in higher borrowing costs, lower consumer spending, and a potential hit to the stock market.
Topic #2: War on A.I.
Baidu, the leading Chinese internet company, has revealed its plans to introduce its own artificial intelligence (AI) tool, known as Ernie, in the coming month.
Is it just Baidu?
Alphabet, the parent company of Google, experienced a 7% decrease in its stock prices on Wednesday, following the presentation of its latest AI chatbot, Bard. This event took place one day after Microsoft held its own event to showcase its AI technologies in Bing, its competing search engine. The official launch of Bard was confirmed by Google on Monday, and the company stated that the chatbot will be made available in the near future.
This move by Baidu comes after a surge in interest in AI technology, as evidenced by Google’s recent announcement of its AI-powered chatbot, Bard, and Microsoft’s $10 billion investment in OpenAI. As a result of this announcement, Baidu’s stock saw a 15% increase, marking its best day since March.
This development is significant for investors, as the AI sector is currently experiencing a boom in funding and investment. Startups in the field are attracting significant investment, leading to a rare bright spot in the otherwise sluggish tech industry.
For individuals, it’s important to approach AI tools, such as ChatGPT, with a critical eye. While these platforms hold immense potential, they are still prone to errors and require thorough fact-checking and a healthy dose of common sense. It’s crucial to not blindly trust the output of these AI tools without proper evaluation.
Topic #3: Has SoftBank Lost Its Touch?
Japanese conglomerate SoftBank announced on Tuesday that it experienced losses in the last quarter. This was due to a decline in the value of its holdings in unlisted companies managed by its Vision Fund business, as well as losses in listed companies such as Coupang and WeWork. The Vision Funds lost $5.5 billion, marking the fourth consecutive quarter of losses, resulting in an overall loss for SoftBank.
These repeated losses have limited SoftBank’s ability to make bold investments and put the company in a challenging situation. To turn things around, SoftBank is counting on the planned public listing of chip design company, Arm, by December. However, the success of this venture is uncertain, as weak market conditions could cause delays and keep SoftBank cash-strapped.
In conclusion, SoftBank is facing a difficult time as it tries to recover from its losses, and the success of its upcoming move to list Arm will be crucial to its future.
Top Earnings at a Glance:
|Index||Level||1 Week||1 Month||From Jan 1 2023|
|S&P 500 (US Stocks)||4,090||-0.71%||3.04%||6.96%|
|Nasdaq 100 (US Tech Stocks)||12,573||-1.31%||7.91%||13.28%|
|CSI-300 (Chinese Stocks)||4,106||0.06%||2.40%||5.62%|
|Bitcoin (in USD)||21,671||-4.80%||20.82%||30.51%|
Source: Google Finance, as of 11th February, 2023