Blain’s Morning Porridge 19^th April 2024: Lessons from Market Disappointment – Get Back Up and Do it Again

“You go back, Jack, do it again, wheel turning round and round..”

It’s been an interesting week – book-ended by Israel-Iran conflict. But we’ve seen yet more let-downs in politics, bonds, interest-rates and markets, and perhaps more nails driven into the myth that is Tesla. Sometimes it just takes one waverer to trigger a rout. In the vacuum of markets, no one can hear you scream.

It’s a dangerous moment for markets when the truth is finally revealed.

At one extreme even the optimists struggle when great ideas are nothing more than average, great men prove to be small, petty-minded, greedy fools, the new, new thing was just the same as, same as, our leaders are mere followers, up is down, and 2+2 do in fact add up to 4 on a balance sheet. The pessimists are in a constant state of disappointment from the moment they wake-up still alive despite the geopolitical traps everywhere they look, panicked by the risk upon risk they perceive – they expect the worst and are disappointed by upside… They are more likely to be bond traders.

The funny thing is… deep down we all know the outcomes that are most probable, but we keep fooling ourselves that maybe, maybe this time they were not. Hope is never a great market strategy, while common sense and questioning assumptions usually are. Or, as I keep saying: “Things are never as bad as we fear, but seldom as good as we hope.”

Where do we go from here? Do disappointed markets surrender, crawl under a tree and cry bitter tears of regret, or do we brush off the losses, promise to learn for our mistakes and get back in the game? The latter of course…. Which is why I am still in the game, and the only sure-fire trading bet is when markets crash, they get back up again! There is a Frank Sinatra song in there somewhere…

“Each time I find myself
Flat on my face
I pick myself up and get
Back in the race”

It’s been an interesting week for disappointments – Get over them..! We live, we learn, we forget.

Middle East

Israel bombing Iran overnight is a continuation of the almost scripted tit-for-tat dance that’s been playing since October. Each are testing each other – but who will stand down first? The market reaction has been almost predictable – a spike in oil, a tumble in stocks, flight to Treasuries, and mild panic before calm is restored. Interestingly, Gold spiked while Bitcoin tumbled – why?

The reality is Iran is at the root of the current instability across the Middle East, funding insurgents in Yemen, Gaza and Lebanon with the goal of breaking down any long-term peace between Arabs and Jews that a Saudi-Israel treaty would allow. The war planners across the region and Washington will know the most permanent and optimal solution would be internal political change in Iran – fermenting revolution by frustrated youth against the ayatollahs, but that will be balanced by Russian/China support for the regime. Experience shows overthrowing one corrupt regime oft results in something worse emerging.

Politics

In the US, you could not ask for a more open invitation to the China/Russia axis to keep destabilising the west. Whilst Republicans in thrawl to Donald Trump and MAGA play their stupid games to embarrass President Biden, Ukraine is left fatally weakened.

The Republican leader will try to meld a deal on Saturday – but it will likely cost his political life. America’s credibility across the free-world will remain a laughing stock, and distrust in the concepts and ideals of democracy left fatally wounded. Nations want growth, prosperity, and peace – and if the US clearly won’t deliver – then maybe Beijing is a better call. China is not stupid. Beijing knows the importance of “not interrupting your enemy while they are making a mistake.” Russia is a different matter – China is in alignment with them today because US weakness makes it so. Long-Term… Russia has resources China craves..

Here in the UK we have the UK’s “worst ever public servant” (says the Times), Liz Truss on a book tour. It’s comedy gold – she is just so hapless. She is threatening a political comeback – excellent, we will need something to cheer us up as the new Labour government struggles to rebuild the economy and society from the omnishambles the Tories will leave them. (The problem with Liz Truss is for 5 microseconds she makes sense: the UK needs growth and productivity growth, and less tax would be good… but then the illusion fades and she goes no further…)

Bonds

All it takes is one Fed head to hint rates could rise before they fall and the mood in bonds and stocks takes a deep bearish breath! The 2024 market started with the absolute 100% certainty US interest rates were about to dramatically fall with unprecedented swiftness. Now we are being managed towards one small rate-cut by year end. When the base case changes all assumptions should also – higher mortgage rates for longer will hit consumption and spending, higher borrowing rates hit investment, and spell crisis for zombie indebted PE companies.

The reality is much of the Western Economy has been constructed around the rate environment of the 2008-2022 which fuelled government debt, corporate debt, personal debt and aberrations like private equity fuelled by debt – essentially the widespread replacement of equity risk by debt funding. The key word.. in case you missed it… is DEBT. Debt becomes a problem when you can’t pay the cost… Yet, markets are still behaving like higher for longer rates are a short-term aberration rather than a long-term reality.

Get used to higher rates.

Rates will remain real – positive, higher than inflation. We are looking at interest rate normalisation as a key central bank policy to restore the normal function of economic activity. We saw how setting interest rates too low created massive inflation in financial asset prices rather than economic growth, with a dramatic increase in wealth inequality as the rich got richer while the poor remained essentially poorer – one major consequence is political populism, MAGA and Trump are consequences of 14 years of low interest rates leaving most of the population behind the elites who got wealthy.

Tesla

This week we were treated to a masterclass from Tesla:

• EV sales are plummeting around the globe. Tesla’s market share of a declining market has fallen from 62% of US EV sales to 51% over the last year. Its margin per car has been slashed to address competition.
• Tesla is the worst performing stock in anyone who holds its’ portfolio.
• In response to increasing competition, falling profits, and to boost the crashing stock price, Tesla sacked 10% of its work force – by email.
• Elon Musk is no longer the world’s richest man. He is 4^th Richest with $185 bln.
• Tesla’s board – which is a standing joke in terms of corporate governance because it is so beholden to Musk – wants to overturn a Delaware judgement against his $50 bln 10-year pay-package.
• Tesla is settling legal cases alleging deaths caused by its flawed driver-assistance system out of court – while the firm still “promises” full-self-driving tomorrow.
• Shareholders are being asked to re-approve the package – while Musk makes veiled threats he can’t remain “interested” in the firm unless he is “properly” paid.

If that is market capitalism at its finest – you can count me out..

They say no-one sees a single tree fall in the forest, but when the once tallest, proudest and most noisy Redwood is exposed as rotten to the core… then that’s when the market tends to take notice and wonder – “what else have I been missing”?

Have a great weekend…

Bill Blain

Author of the Morning Porridge

Wind Shift Capital

www.windshift.capital