Why the Forces Behind the January Melt-Up Are Temporary

Hello everyone. This is Jan van Eck. I just wanted to provide a flash update to our investment outlook for 2023 and revisit why our thesis, sideways for financial markets in 2023, still stands, but explain the melt-up that happened in January. I think there're some very interesting major forces in the markets that were really missed by the mainstream media.

This will be only 3 to 5 minutes. I'm just going to level set again what our base view was, explain January, and give our takeaways.

For 2023, we basically said that we expected financial markets to go sideways because there's a lot of headwinds.

Number one, monetary policy. The Fed is tight. Number two, don't expect stimulative fiscal spending. Government spending isn't going to surge in 2023.

And lastly the world economy is pretty weak. Europe is dealing with energy security issues in the war. China was really in a recession last year and coming out of that slowly. And the United States is dealing with the pressure of high interest rates.

That all results in, I would say, a weak profit outlook.

And if profits aren't going up, then why should stocks? Basically, especially if interest rates are not going down, which we didn't expect.

Just to describe this [01:36, Chart – M2 Growth] very quickly, this is money supply in the United States, M2. You can see the dark blue line is negative. Why? It's still dealing with, why are interest rates going to be higher for longer?

[01:51, Chart – CPI] Because services inflation—also in the dark blue line—are still high, not coming down unlike some goods, and the labor market is still tight.

This [2:02, Chart – Profit Outlook] is just sort of expectations of profits—energy profits going up but overall profits going down—so let's just call that flat, which is also why we don't think that stocks are so exciting.

Now, what happened in January? Why did things rally so much? And the reason is that one of those three pillars to tighter financial market conditions was temporarily displaced, which is that monetary conditions are not tight.

And there are three major things going on. In the United States, for every dollar that the Federal Reserve was selling in bonds, the Treasury Department was buying—number one.

Number two, China was expanding money supply to get its economy going, just like it went to zero-COVID policy. They want to get out of the recession and have jobs growth.

And that meant that money supply in the world grew faster than at any time in the last 10 years.

And then the third point is Japan went nuts on buying bonds since the beginning of December of 2022. Just in the last 2-3 months, they bought over $600B Japanese bonds to support lower interest rates there.

Let's just look at charts really quickly. [03:23, Chart – Fed Tightening] Here in red, you see the runoff in Treasury ownership by the Fed. But you also see offsetting growth in Treasury Department ownership of Treasuries in the green.

So that quantitative tightening in the U.S. has not been as tight as one might think.

And then second chart here, [03:46, Chart - Global Money Supply] you can see that three month change in global money supply—it's basically a third China, a third the U.S. and a third Europe—is the highest it's been in 10 years, that light blue line.

You basically had a surge in liquidity from China that was largely absorbed within China, because they have property issues there. And I say that because their currency, the renminbi, did not weaken very much.

And then you had a lot of bond buying Japan and then you had also some offsetting Treasury purchases by the Fed.

The bottom line is that that meant that for that period of time there was actually a lot of money sloshing around the world economy, and that's why I think that markets ended up ripping in January.

However, my conclusion is most of those factors are temporary. Going back, don't expect Treasury buying of Treasuries to continue at this pace.

Chinese money supply also won't be accelerating. It's maybe a slightly higher level, but this growth level should level off. And then I don't know a lot about Japan, but I think the amount of quantitative easing they were doing is not sustainable.

That's why assets surged in January. I don't think they're sustainable, so we're back to the kind of sideways in 2023.

[05:18, Chart – Munis] And what I like to do is—since we've been saying this since the fourth quarter of last year—I like just to compare the smoother ride of bonds in the dark blue line. This is intermediate munis against the NASDAQ. And you can see despite the January rip, bonds are still winning. In general, it's maybe more of a 40/60 year than a 60/40 year, which is what we've been saying.

[05:45, Chart – U.S. Equities] The last thing I'd like to point out about the equity market really quickly from a 10-year view, these are all the different style boxes.

Large-cap growth was the real winner for the last 10 years. But keep playing to point out that that's probably going to mean revert and close the gap here. Maybe, maybe not, but that would not surprise me.

Thank you very much for listening to this flash update. Happy investing in 2023 and come to vaneck.com for any further information.

Thank you.