We are just riders on the storm until the Fed get hold of the reins

WARREN Buffett, over the last three months or so, has sold $75 billion worth of his stocks including more than half his Apple holding.

In view of what’s happened that merely bolsters his reputation. What it does, too, is make a very specific point about big tech. It was his biggest holding.

The Yen carry trade has skewered lots of funds and money managers, which is a bit silly, since, as professionals, they should have seen the writing on the wall. I did and I’m only a lowly economist. It does appear that the Japanese, confronted by Armageddon, have rowed back a bit to good effect.

The Chinese bond market is flashing deflation. They hold the largest trade surplus globally at about $3.3 trillion. They have deliberately continued to run record trade surpluses, defying agreements previously made. This means they are effectively sucking net demand out of the rest of the world.

Realistically, although America has effectively bankrolled the rest of the world for decades, I can’t help but think they might be coming to the end of their patience. In a very similar way, Germany is at the same point with the rest of the EU.

The US jobs market – unemployment has risen from 3.4% to 4.3%.

There has been a massive and sudden repricing of bonds, equities, currencies – and crypto. In my view that’s not going to reverse quickly. Or at least not until the fundamentals change.

The last time we were (roughly) where we are now was at the end of the Dot Com boom in 2000. Then, the US was running a budget surplus of about 2.3% - can you imagine? Public debt was less than half what it is now. Unbelievable. Anyway, now it is running a deficit of about 6%. In case you need it spelled out, that severely limits the space for manoeuvre and finesse that, for example, Alan Greenspan had.

All this leads me to conclude we are in a very delicate place. It could – in my view – go either way. One of the problems has been the genuinely staggering sums lavished on AI, which, as I’ve previously argued, has achieved very little relative to either need or outcome.

It looks as if the leaders in this field (and remember a first mover so-called advantage frequently ends up with a bloody nose) have realised they are not about to get as rich as Croesus and have started laying-off quite significant numbers of staff and cutting back investment to preserve cash.

So let’s look at a happy scenario. China realises they are effectively devaluing what they hold (one of the reasons they have been buying gold) and eases up by diverting product to their own market. It’s much needed. That would leave more with other countries and allow the FED to cut rates relatively aggressively – say a full 1% by Christmas with more scheduled after the New Year.

That would do wonders for sentiment and allow a significant easing in lots of areas, not least all those banks that are under water from commercial real estate loans that are costing them money. Inflation might stay subdued for a bit. Taxes might bring in more without being increased.

Markets have steadied a bit and might now allow the recycling of sectors and the addition of money into productive assets. In other words the constraints would ease off and people would be able to plan expansion and preservation as opposed to merely survival.

The unhappy scenario doesn’t bear thinking about. One can only hope that the people who matter (ie the Fed) take the plunge sooner rather than later.

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