Blain’s Morning Porridge 27^th September 2024: Market hits 42^nd Record High – What are we missing?

“You cannot be serious.!!.”

The market keeps on rolling upwards, despite it being a month till what might be a make or break moment. Isn’t anyone else worried? Are we doomed to constantly repeat the mistakes of the past? Or should markets just shrug and get on with making money?

 Let me start this morning with three of my most important market mantras:

• The Market has but one objective – to inflict the maximum amount of pain on the maximum number of participants.
• The Market has no Memory
• Things are never as bad as we fear, but seldom as good as we hope

Tattoo them on the inside of your eyelids. Don’t forget them over the coming months.

Apologies for the lack of Porridge y’day. I never got a chance to write y’day as I was playing a game of scramble to find a way up to London, the usual trains being cancelled because of a lack of train drivers! (Huh, that’s what happens when you pay workers to much – screams the Daily Torygraph!) I missed a client breakfast, but more than made up for it with lunch with 5 great friends from my days at HSBC!

As we properly lunched, the fact US stock-markets staged yet another record high nearly passed me by. Significantly if you are a Douglas Adam HHGTTG fan, it was the S&P’s 42^nd record high of the year. There might or might not be meaning in that number.

What’s to worry about? Oh, let’s see. In about a month’s time the US holds a knife-edge election that could see the US dollar, the US and confidence in US Government broken asunder – according to whichever side of the political divide loses. This is heaven, this is hell…anyone for the last few choc ice?

Next week I will write something deep and meaningful on the election – I will be objective and examine the Pros and Cons of each side. I will probably offer some prepper advice as well… tins of beans, water purification tablets and a decent camping stove for a start. It’s difficult not to be concerned reading the garbled nonsense around the US election… It will affect us all. I wish President Zelensky good luck in his meeting today with Donald Trump.

Back at y’day’s lunch… What a giggle as we told our market war-stories from the glory days of the Eurobond market. We recalled many improbable events and memorable deals (many for all the wrong reasons) from the early 2000s. It was great fun, laughing and joshing, and it struck me – we were remembering a quarter century of extraordinary markets, each from our own perspectives. Some of my chums are veteran bond market pros or have moved into buyside roles in new markets, while others have escaped to better things.

Me? I still struggle to understand it all – manically drive to explain what happened, why and what likely happens next. It’s a mild obsession that keeps me writing the Porridge. I wonder if that may be how I cope with whatever form of Post Traumatic Stress Disorder the Global Financial Crisis (“GFC”) 2007-2032 inflicted on me? Perhaps my desperation to understand why…. is some mental disease??

(If this was film… we’d be going into fade-out, the start of a dream-memory sequence….._)

I exited HSBC (after shooting my mouth off once too often) just as the GFC kicked off in 2007. It reached peak panic with the collapse of Lehman in Sept 2008, which in turn triggered 14 years of QE and ultra-low interest rate distortions, ahead of the Pandemic and then the Ukraine war which became the catalyst for the price shock that sent embedded inflation skywards, leading to the current rate cycle shenanigans.

I would argue the GFC is still with us – certainly the consequences on trading and corporate behaviours are. One thing I clearly remember from these days of crisis is quickly we became inured to events – what shocked us on day one, was just another noises-off a few weeks into the crisis. I’ve read about the same thing in wartime, how it becomes difficult to discern the wood from the trees during fast moving events.

I suspect that the last few years of extraordinary events, improbable prices on lacklustre stocks and repeated new, new, things (like AI and Nvidia) pushing the market ever upwards, has left us adrenaline junkies – but somewhat blind to what’s going on all around us. Ie, That it’s the energy to power AI that is the real economic requirement to monetise AI.

Having spent my early career in the bond markets up to 2007, I had a ringside seat at the genesis of the GFC. I’d run the Financial Institutions Groups at Bear Stearns then HSBC, focusing on bank capital, debt and arbitrage strategies, CLOs and credit derivative based risk management. I’d been involved in asset securitisation and HSBC financing its’ acquisition of US sub-prime lender Household. We focused on getting deals done and making money. We assumed risk could be managed and even minimised through complex financial engineering and probabilities.

Of course, as highlighted in Michael Lewis’ classic book, “The Big Short”, some really smart investors figured out the underlying risks and shorted them. When it inevitably happened – they made out like bandits.

The GFC supposedly taught us many lessons… at least we think it did. We learnt:

• Risk cannot be transformed – it can only be identified and transferred.
• Risk management is an art, not a science.
• Liquidity events kill banks swiftly and without mercy.

But we also learn the authorities could rescue and bail-out markets, and then keep economies afloat. Saving markets is a very dangerous superpower – there are costs and consequences. I suspect that is the main reason the markets are so blasé to risk today.. I also suspect the Chinese authorities have thrown the dice and concluded the best way to kick-start the spluttering Dragon Economy is a massive ole’ fashioned financial stimulus to boost dire markets and sentiment – because the West got away with it… Apparently.

I look at such actions with the eyes of a battle-scarred veteran who can guess what the consequences will be. But smarter traders and investors than I, and young blithe bankers and investors look at these actions as buy-signals, just as they see recent easing by central banks purely in terms of higher prices.

Maybe I worry too much.. but winter is coming… (Yes, it is… wrap up warm and remember Mantra No 3 above.)

On that happy thought.. have a great weekend and I will, Casandra-like, be back next week to explain the coming storm..

Out of time and back to the day-job…

Bill Blain

Author of the Morning Porridge, founder of Wind Shift Capital

www.morningporridge.com

www.windshift.capital

billblain@morningporridge.com

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