Yapı Kredi Yatırım/Murat Berk strategy note: The future is already here

In general, doomsday prophecies are louder than adequate scenarios. This is probably because we have been programmed this way by evolution, meaning we tend to focus more on risks. However, for a stable perspective, we need to be especially aware of our prejudices.

Thomas Malthus’ prediction is a good example historically. In his work “An Essay on the Principle of Population” published in 1798, Malthus was actually responding to one of the craziest optimists in history. What he responded to was Nicolas de Condorcet’s work titled “Sketch for a Historical Picture of the Progress of the Human Spirit”. According to this work, history was always progress, and he claimed that with such progress, humanity could one day achieve biological immortality.

As Malthus observed, human populations have increased geometrically or exponentially, while food production has increased linearly. When we look at the origins of many of today’s popular debates, including Environmental Social Governance (ESG), no matter which side you look for, you will find Condorcet and Malthus.

The timing of Malthus’s book could not have been worse. Mechanization of agriculture and settlement of the interior of North America and Eurasia would add countless tons of food to the world. The 19th century also saw the invention of Haber-Bosch and the nitrogen cycle, some of the most important inventions ever made. In this way, it would be made using nitrogen-rich fertilizer and such fossil fuels.

All this said, Paul Ehrlich’s 1968 book “The Population Bomb” had another anti-Malthusian feature. What he called the “Green Revolution” proved pessimistic predictions wrong with a mix of nitrogen fertilizers, plant breeding, and pesticides.

Malthusians today do not talk much about mass starvation, but the underlying idea of ​​Malthus is that the world’s biological system has systemic limits and humans have a tendency to grow beyond themselves. We really need to take this view seriously. Although we do not know exactly what these ends are, we can be sure that there are limits there.

The reason for caution in any bet is that the future is inherently unknowable. The opposite of deterministic pessimism is usually deterministic optimism. On the other hand, there is always something in the past that saves us. Mostly human creativity, that is, technology, will save us in the future as well. Both determinisms should be approached with suspicion. Our destiny is not to destroy ourselves, but our future will be affected by what we do.

As many scientists have warned, the current situation seems risky for life on Earth. Paolo Bacigalupi appears as a novelist who brings to life dystopian visions of what future centuries might look like if we fail to solve current challenges. The 23rd century that Bacigalupi presents in his novel “Windup Girl” is not the kind of place any of us would want to live in. As mentioned in the novel; Global warming has caused the seas to rise to catastrophic levels. In addition; The era of cheap and abundant power is over. Those living in the 23rd century look at the current period as the golden age, which they call expansion.

Compared to the novel, what has changed the most in the 23rd century is the living world and especially our relationship with food. What Bacigalupi was particularly interested in inferring was that biotechnology and agribusiness were trying to take ownership of food. Copyrighting genes, preventing farmers from reusing them, conducting bio-research.

According to Bacigalupi, this becomes biopiracy when companies copyright genetic samples and exploit indigenous knowledge without compensating the people from whom this biological information and material was collected.

Looking at all this, it is as if, as William Gibson said, “The future is essentially here, but isn’t it evenly distributed?” one asks

You can think of our role as a bit like the role of science fiction writers. In other words, this role can be summarized as taking some elements of today and claiming where they will take us.

While doing these, we start by trying to understand which market regime we are in. We can state that the regime we are in is still a “risk on” regime, that is, a regime with a high risk appetite. Although we think that the risk of correction has increased in the short term, our view remains positive for global risky assets.

Some short-term extremes and the narrowing of participation make us think that the risk of correction in the short term is increasing, but we continue to be positive in terms of trend.

For example, last month the technology portion of the S&P500 rose, driven by demand for artificial intelligence shares, especially in the semiconductor industry. This positive price momentum has pushed the division well above the 20- and 200-day moving averages. This is a rare thing and we think it increases the possibility of correction. The S&P500 technology portion is about 8 percent above the 20-day average and about 27 percent above the 200-day average. When we look at market history, we see a tendency for difficulties to occur in the following month, and in previous examples the losses in the following months significantly outweigh the benefits.

Additionally, the tech-dominated Nasdaq 100 (NDX) continues to break record after record, but there has been an increase in shares falling to monthly, quarterly and even annual lows, which is very unusual. As of last Friday, the stock was down less than 3 percent at its 52-week highs compared to its lows. This indicates that the index is rising with an extremely narrow participation.

The issue is not limited only to the USA. The participation problem is now global. Among all country indices, the rate of processes above their 50-day averages decreased from over 70 percent to below 25 percent. Historically, the MSCI World Index has struggled when there have been such share declines.

These make us think that the risk of correction in the short term has increased, but we continue to be positive unless the market regime changes to “risk on/off” in terms of trend. We note that historically, developing country markets have entered a positive seasonal period. Last week was a relatively calm but different week for global markets. In particular, some divisions attracted attention and made us question whether, as William Gibson said, “The future is already here, but it is not evenly distributed.”

US 10-year Treasury bond yields were at their lowest level since March this week. Additionally, in terms of market pricing, two interest rate cuts from the FED have started to be priced.

As for forward-looking indicators, we remain skeptical that the economy will weaken significantly as long as financial conditions remain exceptionally loose. Our scenario remains “no landing”. But markets ignored the strong services ISM data a few weeks ago. Our “no descent” thesis was supported by Friday’s stronger than expected PMI data, but the markets ignored this as well. Manufacturing PMI rose to 51.7, the highest level since March. The employment component reached the strongest level since September 2022.

“The uptick is broad-based as rising demand continues to weigh on the economy,” said Chris Williamson, chief economist at S&P Global Markets Intelligence. “The expansion is supported by a continued recovery in manufacturing, although this reflects strong domestic spending led by the services sector.”

Of course, there are weak points in the economy, but the general economy actually maintains enough momentum to maintain inflationary pressures and keep the FED on the sidelines. Atlanta FED GDPNow indicator remains above 3.0 percent.

On the other hand, risks and potential vulnerabilities continue. For example, one of the risks that is important but not talked about much is the private loan area called “private credit”. In particular, “The Last Mile: Financial Vulnerability And Risks”, 2024, included in the IMF’s recently published Global Financial Stability Report. It provides valuable information on this issue and draws attention to the risks.

As the French elections to be held between June 30 and July 7 are rapidly approaching, global markets are ignoring the potential risks that may arise. Markets were calm as investors weighed assurances from far-right president Marine Le Pen that she would work with Leader Emmanuel Macron if he wins national elections.

Le Pen’s comments reassured the markets. Thereupon, the France / Germany 10-year bond yield difference narrowed on Monday. However, by the end of the week, the spread reached 80 basis points, the highest level in 12 years. French 10-year bond yields rose eight basis points this week, outpacing Portuguese bonds by five basis points and coming within eight basis points of Spain.

If the potential political risk in Europe increases, a global “risk off” correction may occur while the US dollar strengthens.

It is a quote