NEO-CON VS PRO-LABOUR

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I am big believer in developing a theory on assets have traded - particularly when they trade in a way that surprises you. A good theory should produce forecasts than you can then apply. My first theory was “Japan as Saudi Arabia of savings theory” which basically showed that Japan had all this capital, and wherever it invested wold boom, and when it pulled its capital it went bust. This worked well with Asian Financial Crisis, Dot Com Bust and GFC - basically whenever BOJ tightened monetary policy, a big bust ensued. It is a very deflationary theory - and explained why JGB yields were so low. With this theory, whenever Japan tries to normalise interest rates policy (as proxied by 1 year deposit rates) the US market implodes. According to this theory, that should have been in 2022 (correct) and now (not correct).

The second theory that I began to use was “the pro labour” theory. In essence this argued that from 1980 onward we have had a pro-capital policies, which is free trade, freely adjusting currencies, and anti-union policies. This puts all the economic adjustment on labour. With real wages stagnating in Japan and elsewhere, pro-capital policies are bad for commodities, and good for bonds. With Brexit, Trump and populists everywhere, I argued that politics was shifting pro-labour, and was leading to policies that pushed up wages and inflation. That is inflation would be entrenched, and bonds would be in a pro-longed bear market. The biggest supporting data point here was the trend change in gold versus treasuries.

This theory would imply flat to falling real returns to financial assets, which we have not seen in 2024. We have also seen yields falling in China, which is not in line with this theory. So what about using a “neo-con” theory? Does it explain markets since 1980? And does it offer any usable forecasts?