Blain’s Morning Porridge April 8th 2024: Production vs Consumption – Are they Aligned?
“This is the economic constitution of our entire modern society: the working class alone produces all value.”
The strength and resilience of US employment, and the growing sense a recession has been dodged, hides fundamental imbalance: if consumers are too broke to consume, then how are corporate earnings set to rise? Doh!
My spidey-senses are tingling this morning. Everything feels too good – and it’s not raining! It feels weird to be starting the week off by saying… “there is nothing immediate to worry about..”, which of course is about the scariest thing you can possibly think in markets….
Much of the European market was still on holiday last week – but I suspect this first real week of the second quarter of 2024 won’t be that different to what’s gone before…. as long as everyone sticks to the hymn sheet: a resilient US economy, s recession avoided, stronger corporate earnings, AI improving productivity, interest rates to come down, and general sweetness and light all around… then the markets will continue to bounce around higher highs… The longer it goes on, the stronger FOMO makes it…
As always, there are plenty of reasons to be nervous…. Especially if we are missing something fundamental… what could it be?
Have we reached an inflection point in markets?
For cynics, it’s easy to paint a picture this is a market struggling to maintain its current momentum – that we’ve reached the top of a very expensive-looking market already, witnessed by the changing narratives around winners and loser in techs, and tensions around the other themes in the economy – including this year’s election cycles. These perma-bears are constantly pointing to worrying portents and signs of wobble in recent weeks. They are concerned about the market’s apparent lack of “grip” in the face of potential set-backs like an unexpectedly weak corporate report, geopolitics, or shock-events rocking sentiment… but bears are always looking for bad news.
This is as good a point as any to yet again remind readers of Blain’s Market Mantra No 2: “Things are never as bad as you fear, but seldom as good as we hope.”
There certainly is a sense of change in the current market. There is a new reality as the froth about the Magnificent Seven dies down, and the focus switches to the Fab Four (Nvidia, Meta, Amazon and Microsoft). Some say it’s actually just The Funboy Three, dropping Microsoft from the list.
In terms of where money is going I suspect I am not the only market-watcher concerned at trackers distorting the true strength of the corporate sector. The most popular place to put retail money is into S&P500 index trackers – where fee hunting asset managers running retail cash have persuaded clients a well-diversified, basket of the stock market is the place to be.. and so it is as new S&P tracking cash lifts all boats higher.. and makes it look a winning investment strategy. So it is – right up to the moment it isn’t…
If the strength of the US economy, and likelihood the global economy is going to avoid recession, proves grounded, then this is time to switch from trackers into stock fundamentals. The noise around the very few monster stocks driving the market is lessening, attention is more focussed on a simple question: good stocks vs bad stocks: which names are placed to pay steady dividends, fund investment and grow market share, and have the managerial skillsets to succeed? Which aren’t?
Index trackers won’t do that!
This is turning into a stock-pickers market. I’d rather give my money to a thoughtful team who really understand the companies they follow, how their fundamental strength and growth expectations come together, which are the good and bad names in a value market, and which have the capacity to actually deliver. Understanding which companies will succeed is a very different skillset from the investment firms wanting to sell you their basket ETF “product”. The problem is – it will cost more.
What’s on the threat board?
Blind Market Optimism is always a flashing red light… especially when there are potential crises apparent:
The current strength of oil – heading to $100 per barrel – is raising all the usual concerns about “inflationary triggers” and potential destabilisation from the prospects for conflict in the Middle East as Israel and Iran play tit-for-tat and supply lines are slowed by the Houthis. However, the actuality is higher prices are largely a supply driven issue, more about OPEC continuing cuts to push prices higher, Russia struggling to deliver its rogue cargos, and Mexican cuts. Such supply imbalances tend to resolve themselves.
The rising price of Gold – which would normally leave markets nervous on the multiple instability threats any flight to the ultimate safe haven assets tend to raise – look to be on the back of central bank and institutional buying for a range of reasons: China’s central bank not buying Treasuries, and institutions hedging against inflation/rates issues: rates remaining higher for longer because of stickflation. I even read retail investors are selling Gold ETFs – which would be curious if uncertainty was a rising threat. (For the avoidance of doubt – I remain long Gold.)
Last Friday, the US economy posted yet another strong employment report: March jobs numbers on Friday beat expectations, and for the first time in months, the previous numbers were not revised downwards, but slightly higher. It will further add to the growing consensus the Fed is unlikely to ease any time soon – the economy is robust and resilient, while oil prices give it the excuse to remain vigilant on stickflation.
Stock markets seem singularly unconcerned about the reduced likelihood of early rate cuts. That’s a positive fundamental shift in thinking: markets are now looking at reasons to price in future economic growth rather than discounting the effects of further stimulus.
In effect, many of the potential hurdles on the list of current market threats are rather modest.
An imbalance between Micro Corporate and Macro Consumption factors?
Sometimes is possible to completely miss the downright bleeding obvious… Any economy is a dynamic between production and consumption.
While there is a sense the productive side of the economy is thriving on the success of corporates weathering a whole series of micro-economic challenges from supply chains to inflation, the picture is not so strong on the Macro issues on the consumption side of the economy.
In the US MAGA populism has been fuelled by the keen sense workers have been left behind the elites getting richer – and how rising debt levels could create a consumption crisis in the economy. Here in the UK consumers are about to be hit with rising council tax bills while discretionary spending remains shell-shocked from the inflation-shock and the reality that real incomes remain depressed. Rising rents and incomes that have barely risen over 15 years leave a massive imbalance between the hopes and expectations “professional” investors are expressing on corporate incomes vs the dismal reality of consumer disposable incomes!
At some point we’re going to remember that a strong, vibrant, robust, productive economy is one in which production and consumption are in balance…. If there is an economic surprise coming it might be the one that occurs when economies stall because everyone is broke…
Out of time and off to look for a day-job!
Bill Blain
Strategist, Author of the Morning Porridge
Wind Shift Capital
