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Market Pulse
Monday, June 19, 2023

A Jobful Recession, The Power of Narratives and China’s Idle Youth

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

In this week’s edition we have:

  1. The Jobful Recession
  2. Power of Narratives: Microsoft & Alphabet
  3. China’s Idle Youth

Adrian (Portfolio Manager), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) The Jobful Recession

After ten consecutive interest rate hikes in the last year or so, the US Fed decided to wait. Call it a pause, a skip or a stop [1], but one thing is sure: Chairman Jay Powell is a skilful communicator and he made sure that it could be any of the three depending on future data points.

One of the primary data points the Fed is tracking is the labour market which has been strong throughout this hiking cycle, making taming inflation harder. The common view is that we need a recession to bring down inflation, and that we cannot have a recession with a strong job market at the same time [2]. We thus need to see some pain in the labour market to get that inflation back to 2% from the current level of 4-5%. But does it really have to be that way?

In the early 2000s, after the dot-com bubble, for example, the Fed kept interest rates low for a long time because the labour market showed no signs of improvement, prompting what economists now call the Jobless Recovery [3]. In hindsight, it was a policy mistake on the Fed’s part because the low-interest environment fuelled the real estate bubble that finally burst into the Great Financial Crisis of 2007-2009. Could they be making the opposite mistake now? It wouldn’t be implausible and somewhat explains their decision to wait and see.

2) Power of Narratives: Microsoft & Alphabet

Microsoft made all-time highs last week as it’s looking to cash in on its sudden AI dominance [4] to the detriment of Alphabet – the self-proclaimed AI-First company since before AI started to dominate every dinner conversation. There’s no denying that the technology is powerful and that Microsoft has moved fast but don’t underestimate Satya Nadella’s communication skills. The Microsoft CEO has masterfully controlled [5] the narrative and executed perfectly on a PR campaign since January 23rd when they announced the extension of their partnership with OpenAi.

But what if instead of Nadella declaring war on Google’s search empire, Sundar Pichai, Google’s leader, had hosted a press conference announcing the launch of Google’s new AI-powered Workspace and declared war on Microsoft Office’s productivity suite?

Surely, it wouldn’t have been hard for a company sitting on that much generative AI product back in January to create an Office-killer demo that creates beautiful presentations, forecasts financial models and automatically replies to emails. Wouldn’t investors be alarmed that such a product would commoditize Microsoft’s cash cow instead of the other way around?

History is abundant with attempts to shape narratives: Microsoft succeeded in putting "A PC on every desk" but failed to put a "PC in every pocket" [6]. On the other hand, Alphabet won in Search, but the Google Graveyard needs an extension [7]

The current debate is far more complex, and there are valid arguments and rebuttals on both sides, but what’s undeniably true is that narratives are powerful catalysts, and they will dominate markets until hard data, fundamentals, and eventually time will quiet things down and separate the hype from the substance.

3) China’s Idle Youth

Chinese youth unemployment (aged 16-24), already at record levels in April, hit another new high in May [8], reaching 20.8%. There are many explanations for this, from a structural mismatch between skills and available roles to a more temporary pandemic effect that hampered a service sector heavily reliant on young workers. [9]

What's mind-boggling, however, is that the number keeps climbing despite the post-covid economic recovery. At the same time, the government is making intense efforts to raise birth rates and increase the quality of its young workers through better education. 

The 6.3 million unemployed youth is still a small number relative to China's 486 million urban workforce, so instead of addressing the problem Xi Jinping feels he can simply tell them "to eat bitterness" or "move to the countryside" [10] for now.

But much research [11][12] shows that being jobless at a young age can cause lasting damage, including earning less money in the future, having trouble finding work later, and facing more life challenges in general. It can even lead to more mental health issues in middle age. 

Although it may seem small in the context of the most populous country, youth unemployment is also indicative of the government's challenge to curtail large internet companies like AliBaba and Tencent which are attractive employers for the educated youth. 

It is worth keeping in mind that the younger generation often takes an active role in driving social change. At some point the rapidly increasing cohort of unemployed young people in China might want to do more with their lives than to just “eat bitterness”.


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[1] https://www.bloomberg.com/news/videos/2023-06-14/powell-don-t-call-this-rate-pause-a-skip-video?srnd=all

[2] https://www.reuters.com/business/retail-consumer/fed-needs-recession-win-inflation-fight-study-shows-2023-02-24/

[3] https://www.epi.org/publication/issuebriefs_ib186/#:~:text=At%20the%20end%20of%202000,in%20the%20most%20recent%20quarter

[4] https://www.bloomberg.com/news/features/2023-06-15/microsoft-prepares-to-cash-in-on-openai-partnership-with-copilot

[5] https://time.com/6278841/microsoft-ceo-satya-nadella-on-artificial-intelligence/

[6] https://news.microsoft.com/2013/09/03/microsoft-to-acquire-nokias-devices-services-business-license-nokias-patents-and-mapping-services/

[7] https://killedbygoogle.com/

[8] http://www.stats.gov.cn/english/PressRelease/202306/t20230615_1940633.html

[9] https://www.goldmansachs.com/intelligence/pages/why-has-youth-unemployment-risen-so-much-in-china.html

[10] https://www.japantimes.co.jp/news/2023/05/31/asia-pacific/china-youth-unemployment/

[11] https://academic.oup.com/oxrep/article-abstract/27/2/241/429358?login=true#no-access-message

[12] https://academic.oup.com/eurpub/article/24/3/440/477204

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