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This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. The 47 per cent plunge in Spirit Airlines shares yesterday, after US courts blocked its acquisition by JetBlue, was ugly. But not as ugly as the stock’s long-term chart. The discount airliner has bled nearly 90 per cent of its value in five years. It also happens to be among America’s most-hated airlines. For the privilege of not buying Spirit, JetBlue stock rose nearly 5 per cent yesterday. Email us: [email protected] and [email protected] inflation index you use mattersWhen you read in the financial press about “inflation”, more often than not that means the consumer price index, the best-known and most-timely measure. But when the Federal Reserve mentions “inflation”, it probably means the personal consumption expenditures price index, which it has explicitly targeted since 2000.This technical distinction is well known but often forgotten, and occasionally matters quite a bit to markets. Now may be one of those times. As investors debate whether the Fed will cut interest rates at its next meeting in March, the “wedge” between CPI and PCE core inflation has been rising since July and now stands at 100 basis points (the wedge is CPI minus PCE, in year-over-year terms):The gap is being caused by surprisingly benign PCE inflation, which, in principle, the Fed should care a lot about. On a six-month annualised basis, core PCE is at 2 per cent — right on target. Based on Friday’s deflationary producer price index (which feeds into PCE), analysts expect December PCE data to look cool when it comes out next week. This is something the central bank could conceivably act on in March. It even earned a mention in Fed governor Christopher Waller’s market-moving speech yesterday:If [private sector] forecasts hold true, then core PCE inflation in December will remain close to 2 per cent, when measured on a three-month or six-month basis.PCE inflation of 2 per cent is our goal, but that goal cannot be achieved for just a moment in time. It must be sustained at a level of 2 per cent. As I said earlier, based on economic activity and the cooling of the labour market, I am becoming more confident that we are within striking distance of achieving a sustainable level of 2 per cent PCE inflation. I think we are close, but I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably towards our inflation goal.In a note to clients on Friday, Matthew Luzzetti of Deutsche Bank argues that the relative weakness in core PCE adds to the case for imminent rate cuts. Since the Fed targets PCE inflation, a 100bp CPI-PCE wedge means that the PCE-implied real interest rate is some 100bp higher than that implied by CPI. That suggests a greater risk of overtightening, and a greater need to lower nominal rates sooner. Luzzetti writes:For a Federal Reserve targeting PCE inflation, these forecasts for the real policy stance point to the potential need for earlier rate cuts to ensure that policy does not passively overtighten. For this reason, we noted in a recent piece that we saw rising risks that the Fed would have to cut rates earlier than our baseline of June. This week’s [CPI and PPI] data, and in particular the implications for the real fed funds rate over the coming months, have added to those risks.Importantly, these cuts would be to maintain the stance of monetary policy in the face of falling inflation, not to loosen policy.The wedge has divided Wall Street economists. Barclays on Friday moved its call for the Fed’s first rate cut to March from June, citing downside surprises in PCE inflation. Morgan Stanley has argued the other side, noting that the Fed will probably care more about the composition of inflation. That is to say, while overall core PCE inflation has slowed down nicely, much of that has been driven by goods deflation, and PCE services inflation looks less settled. March might be too soon for the Fed.Omair Sharif of Inflation Insights shares the latter view. He points out several PCE services categories, including medical care and portfolio management, that have dragged PCE lower but are likely to reverse. Portfolio management inflation, in particular, tends to track US stocks, which rallied in November and December. “The Fed understands what’s driving the wedge,” he says. “Over the next month or two, the risk is that these items start contributing more positively, [pushing] the month-over-month core PCE rate higher and narrowing the wedge.”We tend to think the Fed will wait past March, because labour market weakness is not yet forcing its hand. But either way, the point is that when the Fed is data-dependent, investors should mind what data they’re depending on. (Ethan Wu)USA versus ROW, part IIYesterday I wrote about the staggering outperformance of US stocks versus their global rivals over the past decade, and whether investors should make a bet on mean reversion, and tilt their exposure away from the US now.I could have posed the question at the core of my piece more simply. The stick-with-the-US crowd, as represented by Goldman Sachs Wealth Management and echoed by many readers, argues that the current premium for US stocks is appropriate or even low. This is for the simple reason that the US enjoys unique strengths, such as natural resources, demographics, technological excellence and better-run corporations. The superior earnings growth and below-average risk these create should justify a US premium. A premium, sure. But the size of the premium matters immensely. Below, from Bloomberg, is the total return for the S&P 500 and some large rival markets over the past decade and the decade before that, in dollar terms (I have included the S&P equal-weighted index as a way to gesture at the issue of the outsized contribution of the Magnificent Seven big tech stocks to US returns). In 2004-14, the US had all the economic and cultural advantages it has now. But the S&P’s returns in that decade were no better than those of the FTSE, and trailed both Europe and the emerging markets. Nothing about the US makes it an intrinsically superior returns-generating machine, because investment returns are always partly a function of the price paid. So, again: what is the right premium? Perhaps comparing earnings multiples confuses the matter. Instead, think about growth rates. The simplest way to do this is with the Peg, or price/earnings to growth, ratio. Below are the current forward price/earnings ratios of the markets listed above (from Bloomberg again). Assume that the growth rate of earnings in the US over our planning horizon is 7 per cent (in line with the past 10 prosperous years). That gives the US a Peg ratio of 3.1. Assuming the same Peg for the other indices renders an implied earnings growth rate for each:This is awfully simple stuff, and using different growth assumptions for the US changes the picture somewhat. But the point is clear: the premium on US stocks implies either a very large gap in future growth rates, or a very large premium for stability. Do not be hypnotised by US stock returns over the past 10 years. They tell you little. Whether the S&P is properly priced relative to the rest of the world is a matter of implied growth rates and implied volatility. One good readYemen’s Houthis are attacking cargo ships. The FT’s Alan Beattie surveys the damage.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

Xi and Putin defy ‘rules-based’ order. Gillian Tett looks back to assess globalisation’s future. Investors chase the AI grail. Threat to democracy in ‘year of elections’. Latin America’s chance. Africa’s leadership. Davos and memory of times gone by More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.I did Davos once. I schmoozed with billionaire bankers and businessmen. I spent hours in queues below sniper-strewn roofs waiting for now-King Charles and then-President Donald Trump to pass. I got an incredibly tight squeeze from Cherie Blair after moderating a panel convened about 15 minutes before it started when the Ghanaian president couldn’t make it for our “fireside chat”. I listened to many men wax lyrical on the limitless potential of blockchain technology (before telling them, as politely as I could, why they were wrong).That was four years ago, just before Covid-19 shut much of the world down, when the official theme for the conference was “stakeholders for a cohesive and sustainable world” — a theme so perfectly generic and management-speak-ish that it sounds as if it were produced by some early version of ChatGPT. With this year’s “rebuilding trust” as the World Economic Forum’s theme, generic management-speak could indeed be thought of as the lingua franca at Davos. Last year, one of the “key takeaways” from the conference was apparently the importance of “cultivating mattering” which, according to a WEF report, is “truly a meta-skill for modern management in a fragmented world”.It has become something of a cliché to call out the hypocrisy — and the detachment from reality — of the elites who descend on the Swiss Alpine village each year. But the hubris among the Davos set is palpable.“It’s pretty extraordinary that we, a select group of human beings because of whatever touched us at some point in our lives, are able to sit in a room and come together and actually talk about saving the planet . . . it’s so, almost extraterrestrial, to think about,” former US secretary of state John Kerry, a Davos regular, told the conference last year.This year, Bloomberg, in its spiel about the “Bloomberg House” set up for this year’s conference, tells us that “meaningful change happens when the right people come together in the right place”.All of this would probably have seemed good and proper in the conference’s glory days in the early to mid-noughties, when the idea that globalisation was an unalloyed good was not just the consensus at Davos but across the world. This was the time of “hyperglobalisation”, when global trade was growing significantly faster than gross domestic product — an era that ended with the global financial crisis of 2008.The whole idea has gone out of fashion — even becoming a dirty word in some (predictable) quarters: Trump recently used it to insult his GOP rival Nikki Haley, telling a crowd “she’s a globalist; she likes the globe”. And no forum is more associated with globalisation than Davos. According to a Google tracker of frequency with which words and phrases are used in English-language books, the term peaked around 2007, falling sharply since. The use of the word “Davos”, meanwhile, follows a remarkably similar path and peaked in 2008.It is 20 years since the American political scientist Samuel P Huntington used the term “Davos man” to describe the kind of “gold-collar workers”, or “cosmocrats”, who “view national boundaries as obstacles that thankfully are vanishing, and see national governments as residues from the past whose only useful function is to facilitate the elite’s global operations”. But the idea that the Davos global elite would rather be schmoozing with each other than dealing with the messy business of national politics persists, and for understandable reasons. Last year, UK Labour party leader and likely next prime minister Keir Starmer told The News Agents podcast he would choose Davos over Westminster “because Westminster is too constrained”.The archetypal Davos Man is indeed still a man, too. This year, 28 per cent of the conference’s attendees will be women — a “significant milestone”, the WEF tells me. That’s up from 15 per cent ten years ago — a slight improvement, certainly, but the fact that only just over quarter of attendees are women in 2024 hardly seems something to shout about.The truth is that Davos is losing its relevance and increasingly seems out of touch with the spirit of the times. Once a place, perhaps, where people with starkly different perspectives could talk on neutral ground, it has become so associated with one particular pro-capitalism, pro-globalisation worldview that many of the world’s most powerful people — including the world’s richest man, Elon Musk — would now rather poke fun at it online than attend.Now in its 54th year, Davos is declining. Its chair, Klaus Schwab, is apparently in good health, but he is in his 86th year. Will Davos survive him? I’m not altogether convinced. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Predictions of a bright new dawn for Latin America tend to elicit polite scepticism, at best. The region has disappointed citizens and investors alike over the past decade.Its economies have barely grown and living standards have mostly stagnated or declined. South-east Asia has eclipsed it as an investment destination and a manufacturing hub. Former US diplomat Henry Kissinger famously dismissed Chile as “a dagger pointed at the heart of Antarctica” due to its supposed lack of strategic importance.Yet Latin America today commands fresh attention because of its potential to help meet some of the 21st century’s biggest challenges: producing food, generating clean energy, extracting critical minerals, and fighting climate change.Latin America has two-thirds of world lithium reserves and about 40 per cent of its copper. It accounts for 45 per cent of global agrifood trade, according to the EU, and its abundant stock of farmland and water could allow that to grow much further. It is home to the world’s largest surviving rainforest, the Amazon, and its diverse geography includes some of the best locations on the planet to generate solar and wind power.This combination of strengths gives Latin America its best chance in a generation to lift its economies out of stagnation, make its people wealthier, and assume a bigger global role.It also enjoys some other, less obvious, advantages in today’s troubled world: its states are not at war with each other; it is more democratic than any other developing region; and it is building soft power — latino music, food, art, and films have global audiences. In addition, digital nomads cite Mexico City, Medellín and Buenos Aires as among the world’s best cities for remote working.In a region inured to jibes about being the eternal land of future promise, the key question is whether its governments can rise to the task.Lithium: Latin America has two-thirds of world reserves . . . the above mine is in the Atacama Desert in Chile . . .  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Ebullient financial markets. Better than expected economic growth. Rising optimism that the worst inflationary upsurge in decades has finally been vanquished. The economic backdrop to this week’s Davos meetings was far more promising than many anticipated a year ago. But if the tone of discussions at the World Economic Forum is anything to go by, nobody is ready to celebrate.Even if leading economies led by the US are heading for a “soft landing” in the wake of brutal interest rate increases, that story is being drowned out by rising anxiety about the myriad geopolitical risks that are looming in 2024 and casting a haze of uncertainty over policymaking.Wars are raging in Europe and the Middle East, with the latter conflict leading to the mass diversion of shipping around southern Africa, raising corporate input costs and potentially inflation. At the same time, eight of the 10 most populous countries in the world are holding elections this year, heralding a period of acute political volatility.The most consequential of these is arguably the US presidential election in November. Donald Trump’s victory in the Iowa caucuses on the first day of the WEF rekindled concerns that the White House could be retaken by a president with scant regard for traditional US alliances or a rules-based international system that is already under threat.Donald Trump’s strong showing in Iowa deepened concerns about a worsening stand-off between the US and China More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is chief market strategist for Europe, Middle East and Africa at JPMorgan Asset ManagementMarkets are still parsing the implications of the early Christmas present delivered by Jay Powell during his December press conference with comments signalling a sharp shift in the US Federal Reserve’s stance on interest rates.As the initial wave of excitement over the shift fades in the new year, there is now a considerable amount of head scratching regarding the change of heart that came just a few weeks after the US Federal Reserve chair was still warning of the possibility of even higher rates. Given the scale of the move in both stock and bond prices since the comments, this does warrant further examination. The argument Powell has put forward is that the outlook for inflation has improved significantly, despite resilient activity. As such, the Fed is now increasingly convinced that economic growth can continue at trend, unemployment can stay low, and it will still sustainably meet its 2 per cent target. In contrast to what it thought earlier in 2023, a recession is no longer required.Powell’s argument is then that without a need for economic weakness, interest rates don’t need to be as restrictive. They should instead be at what economists would term “neutral”. In simple terms, the Fed doesn’t need to keep its foot on the brake, so should shift gear and move to idle. The Fed is one of the few central banks that produce an estimate of what it believes ‘idle’ is. Its current estimate is 2.5 per cent, suggesting the current policy rate of 5.25-5.5 per cent is way above where it needs to be. If all elements of this argument are correct, the Fed would be right to not waste any time in bringing rates down. This is what the market is now pricing, with the first cut in March and rates 1.5 percentage points lower by the end of the year.There are two elements of this argument that are worth questioning. First is whether too much weight is being placed on current inflation to assess medium-term inflationary pressure. It was acknowledged when inflation was at the highs of 9 per cent that the Fed should look through temporary spikes caused by distortions related to the pandemic. If it were working then on the basis that it needed to keep real interest rates close to 0.5 per cent, and deflated the policy rate using headline inflation, it should have taken interest rates to 8.5 per cent.The Fed should be symmetric in how it reacts to deviations from target. It was right to look through the upside temporary distortions that came with the pandemic. In a similar vein, it should look through temporary weakness arising as supply chain distortions unwind.The second element comes from its confident assessment that the neutral or “idle” rate of interest is 2.5 per cent. The fact the US economy has proved so resilient suggests it is significantly less rate sensitive than it was, and can sustain materially higher rates more easily than before the pandemic. In part, this is because fiscal policy is, and remains, much more stimulative than it was in the decade after the global financial crisis.My concern is that the US economy is at, or very close to, full capacity. Falling energy and goods prices alone will provide a significant boost to consumers’ real income and spending power. It is a cost of living shock but, this time, of the good kind. The Fed cutting interest rates would then add further stimulus which risks reigniting inflationary pressures and undoing all its good work so far.We have seen the problems caused by premature central bank celebrations in the past. This was well-documented in a paper by the IMF last summer titled “One Hundred Inflation Shocks: Seven Stylized Facts”. The key line was: “Most unresolved [inflation] episodes involved ‘premature celebrations’, where inflation declined initially, only to plateau at an elevated level or reaccelerate.” There is no doubt the inflation picture has improved globally. We are not facing a 1970s style wage-price spiral that requires a deep recession to stop companies and workers asking for higher pay. But central banks should also consider the risks of large, pre-emptive cuts, when so little is clear about sustained inflationary pressures or the neutral rate. If the Fed does deliver large cuts in the coming months, markets for “riskier” assets such as equities could initially do very well. But these gains may not be sustained. In such a scenario I would be more inclined to add bonds with inflation index-linked returns to my portfolio rather than long-term government bonds or risk assets.   More