Waiting Game, Japan, Fusion

Waiting Game

The timeline for the Fed is getting clearer as we approach the end of the rate hiking cycle. We have an expected .75% hike on November 2nd, a .50% hike on December 14th and a possible but unlikely .25% hike on February 1st. After a prolonged bear market, the end of the rate hikes on the horizon is a welcome sight. We’ll need to see official CPI inflation numbers trending down for that schedule to hold. Many inflation metrics are slow to move and will take time to naturally work through the system, like the impact of global shipping prices falling or the slow-to-move real estate markets.

Markets are forward-looking and will discount new information as the certainty grows. With just two months of Fed meetings, we may be at or near the end of the “don’t fight the Fed” pressure. The Fed balance sheet and record high government debt are other factors, but the regular rate hikes are the most important currently. Many risk assets are sitting at or just above their lows, and many other asset classes have fallen well below their Covid lows. 2023 may bring an official recession and lower inflation numbers. If that’s the case, we could see rate cuts in 2023. The futures market has been predicting rate cuts in 2023 on and off.

Japan reopening for tourism

We are slowly but surely closing the final chapters on global Covid lockdowns. Japan is reopening its borders for international tourism this month. For context, Japan received 2.6m visitors in Jan 2019 and 17k in Jan 2022, for a -99% drop. Asian countries continue to have strict Covid rules, so any broad reopening signals can be considered significant progress towards Covid progress.

We still have to contend with the portion of the population susceptible to long-Covid symptoms. Just because tourism is reopening does not mean Covid is over. For an unfortunate example, Covid related hospitalizations in Munich increased by 137% following the recent Oktoberfest event. There is a mixed bag of good vs. bad news regarding Covid. It’s great that the world is reopening, but it’s not without serious challenges for certain groups or geographies. Expect more challenges in specific demographics and circumstances.

New Fusion Site

The STEP nuclear fusion project in the UK has officially selected a site for the UK’s first operational fusion power plant. For decades we’ve seen experimental tokamaks built around the world to test and develop the proof of concept. STEP is one of many global fusion projects that intend to be fully operational. We wrote back in July this year that recent breakthroughs in magnet technology have dramatically accelerated the timeline to fusion from a few decades to just a few years.

Almost all money that has gone into fusion has been effectively philanthropic. Commercial fusion is on the horizon, so we can expect to see more money flow into fusion and related technology.

Energy policy is a frustrating topic at the moment. We know that a single 1-inch pellet of uranium is the equivalent of 120 barrels of oil or 1 ton of coal. Nuclear fission powered by uranium has not progressed in the last 50 years despite the enormous energy density advantage and obvious climate benefits. People are scared of uranium, and understandably so. Perhaps we will skip the growth in nuclear fission altogether and adopt fusion instead. Fusion has no meltdown risk, nuclear waste, radiation/contamination risk, and no relationship to atomic weapons.

You don’t want to build for the future using old technology, so perhaps it makes sense to wait for fusion rather than continue to push fission on people who are adamantly opposed. Many consider the push toward nuclear to be a bullish sign for uranium investment, but the possibility of alternatives makes it far less compelling. I’d rather wait to see what fusion is capable of when the time comes, and it’s not that far off.