Blain’s Morning Porridge May 1 2024: May Day – Stocks to go Up or Down… The New Reality
“To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each.”
Whatever the Fed says or does today, markets have reached a cusp. How will they adjust to the reality of new higher, normalised interest rates: throw their toys out the pram, or acknowledge higher rates are the building blocks of a stronger economy?
May Day – workers of the world unite and all that!
I suppose Workers should be my topic of the day. Despite years of wokery about the need for diversity, fulfilment and happiness in the workplace, and healthy working environments – it’s all hypocrisy. The reality is the treatment of workers and inequality in the workplace today is as bad today as it ever was. More on that below…
First up – later today I will be publishing a Porridge Extra: The Economic Consequences of the QE Era.
It is a longer than usual thought-piece – which is why it is going out as a separate note. If you are hoping for snappy, happy soundbites and punchlines to explain monetary policy mistakes and their consequences between 2008-2022, you might be disappointed. It’s an outline of how QE and ultra-low interest rates fundamentally destabilised the workings of western capitalist economies, and how economists and the policy makers they advise have to factor-in how distorted interest rates influenced economic behaviours. Unless we understand these, we will be doomed to repeat the same mistakes when the next financial crisis inevitably hits.
(I would very much appreciate reader comments on the note, and it will form the basis for economic presentations I’m giving in coming months.. (There is still space to book me if you like it!))
And speaking of the next financial cisis….
US FOMC: Funny how the US Fed is meeting on MayDay.
Markets look a bit binary today – will markets go up or down when the Federal Reserve’s FOMC decision is announced? Although its 99% likely to be no ease, steady rates and Jerome Powel muttering about higher rates for longer in the face of stickflation and robust conditions – we still don’t know what will follow. It all depends on nuance, mood and how Jay says it. As the year progresses towards the US election it becomes increasing less likely the Fed will do anything surprising… (Which is why a small number of folk wonder if the Fed might yet surprise us today… )
Two outcomes are likely:
Markets to go up: No rate cut, but no rate hike in prospect either. Economy adjusting well to higher rates – small rise in corporate defaults and consumer delinquencies, but otherwise earnings continue to rise, rising corporate investment into productivity and product gains, and strong labour market continues. These raise potential inflationary risks, but these are normal in a strongly growing economy. Conclusion: Buy Equities.
Markets to go down: Many Equity buyers have not factored in the reality of higher normalised rates and inflation remains a more substantial threat than they perceive. These factors are taking their time to work into the market mindset – and the 2% interest rates that were expected to sustain the “forever rally” just aren’t ever going to happen, thus current equity valuations look very expensive relative to rates. Conclusion: Sell/Hold
Hmm… incisive stuff: Markets might go up, or they might go down.. NSS. (No sh*t Sherlock). But I will go with the later – not necessarily that markets go down, but there are no strong reasons for them to go up. Hold. Caution.
I came across a new expression yesterday: Deferred-Landing. While the economy has not experienced a hard-landing, or a soft-landing – we still seem to be flying! A deferred landing seems closest to my own gut-feel: the market is still adjusting to normalised rates. Some market cohorts are still in the la-la-land of expecting rates to tumble dramatically, others are only now waking up to issue that rate-cuts haven’t happened, while an increasing number now fathom the new reality that’s rates have normalised and are going to remain higher for longer. At some point sooner or later the markets will find an equilibrium.
The question is – will it happen with a cataclysmic crash? We are about due something painful as big crashes happen ever 15-20 years. The huge intra-day swings we’ve seen on relatively ‘of-the-moment” news on numbers or deals in the Tech sector very much hint at very nervous and fragile markets.
Or will we see the market stage a more modest correction – seeing much of the froth in over-priced stocks dissipate, while fundamental value stocks remain bruised but not battered. When I’m looking at stock-calls from the investment banks I’ve been struck by the number of analysts saying certain stocks look very good, but wait for a lower entry point.
My guess – for that is all that I know – is we will see something of a correction, a flatline summer and then a resumption of the upside as more news and views emerge. While crashes happen, markets quickly pick themselves up – and remember Blain’s Mantra no 2: “Things are never as bad as you fear, but seldom as good as you hope”.
Swirling markets at the top of the tide set all kinds of cogs in motion – from maintaining dollar strength to setting realistic expectations across valuations and expectations.
It’s going to be interesting to see what happens re Yen; rumours of concerted Central Bank intervention to support the Yen sound so 1990s, but are possible. If the Bank of Japan really wants to collude with a weaker yen to support exports, then dumping US treasuries, and forcing up bond yields would be one way to do it, but at the cost of unbalancing US markets, which are one primary source of demand for Japanese goods!
In bond prices there is truth, and for the time being there is no reason for bond yields to trend lower in the face of refinancings and rates.
Labour Markets
I opened the papers this morning and couldn’t believe the story that Tesla, overnight, sacked its entire Supercharger team. The firm already announced plans to sack 10% of its global workforce as Elon warns managers about getting rid of people “who don’t obviously pass the excellent, necessary and trustworthy test.” Here was I thinking the rollout of Tesla’s supercharging networks were part of its’ leading EV infrastructure, a factor that made it so valuable, making Elon so fantabulously rich – but here he is, sacking 500 people overnight. That seems desperately unfair – and speaks volumes about what sort of person he is.
Last night I watched a news item on the local BBC news about diversity among train-drivers in Hampshire. Apparently, the average age of train drivers is a “shocking” 46, and nearly 90% of them are white and male. The horror, the horror.. They then interviewed a gushing HR head of diversity for Southwest trains who gushingly explained the absolute importance of diversity on the trains to create ideas, creativity and workspace harmony. I bet she is gushingly well paid. Train drivers are also well paid, but work alone in their cabs – which will limit their contribution to workplace diversity. The gist of the message was – don’t apply if, like 42% of the UK population you suffer from the genetic impediment of XY chromosomes or pale skin.
The BBC once told me I was being dropped from the schedules for being “Pale, Male and Stale.” I’m still here…
Finally, my son lost his job earlier this year after new US management decided to de-prioritise the drinks brand he managed in favour of new acquisition. Since then he’s done umpteen interviews, and I am watching in considerable apprehension at the toll it is taking on him. He’s a resilient lad, and can face being told “sorry, but no”, but he is struggling with the process.
In my day an interview process was impressing your prospective bosses, demonstrating you were a better bullsh*tter than the other candidates, and forming bonds. Today my son is being put through multiple competitive stages, and being asked to present original work for each – effectively a university entrance exam to progress to the next stage. Last week he spent 4 days on a new brand management plan (100% effort and research) only to be told he was “too young” for the role, while finding out he’s effectively written the plan for a product launch next year! I’ve told him to demand day-rate payment from the next company that asks him to present a fully formed brand plan as the next step in a 10-stage interview process.
Why is so difficult? Testing candidates to destruction will not uncover the best ones. When I interviewed candidates for roles, I could tell in moments if they were right or wrong for the job. It was then choosing between the good ones. But today there is a whole HR industry in place – and the misery and blatant inefficiency of modern recruitment exists solely to justify their existence… not to find the right people for the role!
More to follow on QE this afternoon…
Out of time and back to the day job…
Bill Blain
Author of the Morning Porridge
Wind Shift Capital
