Complacency rules – what could possibly go wrong…?

Global Markets are somnambulating into the holiday slumber. But, a restful summer does not beckon - everyone fears complacency. Crashes follow a predictable patten – while everyone is looking at the wrong thing, some smart cookie spots the real problem, it happens, the regulators close the loophole, and inevitably it happens all over again somewhere else. What will drive the meltdown this time? Your guess is as good as mine!

Blain’s Morning Porridge 16June 2021 – Complacency rules – what could possibly go wrong…?

“It’s quiet out there… too damn quiet.. [sound of thrown knife thumping into sentry’s back.. followed by exaggerated tumble off Fort Zinderneuf’s watchtower..]”

This morning: Global Markets are somnambulating into the holiday slumber. But, a restful summer does not beckon – everyone fears complacency. Crashes follow a predictable patten – while everyone is looking at the wrong thing, some smart cookie spots the real problem, it happens, the regulators close the loophole, and inevitably it happens all over again somewhere else. What will drive the meltdown this time? Your guess is as good as mine!

There is a very interesting article in the FT this morning: Why is Wall Street’s fear gauge so low? It considers the lethargic 15.7 Vix print, a low since the start of the pandemic, and record low volatility on FX markets. It concludes there is a “high degree of complacency in markets”. I am sending one of my coveted No Sh*t Sherlock awards to the team at the FT – it’s a great piece but blindingly obvious.

We feel increasingly alert” is the benchmark quote… followed by predictable tosh about what comes next, with a few snippets like “higher downside risks”, yada yada yada. Like the legionnaires in the fort, we are all going to die… sometime. Not necessarily today or tomorrow… but. Let’s figure the most likely way’s the market might be conspiring to mug us.

A classic crash is brought on by something obvious, a market anomaly hidden in clear sight… like the fact unemployed bus drivers in Harlem were unlikely to be able to repay 100% $500k mortgages, or how fervid speculation about trade possibilities in the South Pacific islands were not grounded in reality. Usually someone very bright, clever,and often slightly autistic, spots the downright bleeding obvious, is ignored by everyone, until they are proved right and later hailed as an investment god.

My first crash was the great perp stumble of 1986. Banks were issuing tier 2 capital in the form of callable perpetual notes paying a slim premium over their senior debt. Investors were blithely assured the banks would call the bonds after 5 years. On that basis they looked a very attractive bond.

It was only when someone put all the pieces together and figured out i) banks could count these instruments as capital, ii) they were only a few basis points higher yielding than senior debt, iii) a perusal of the prospectus would reveal the call was entirely at the bank’s option… therefore, the notes were not the higher yielding 5-year bank paper investors thought they were buying, but cheap perpetual capital for the issuers.

The rest, as they say, is history. The hidden anomaly was not understanding what had been traded. The market collapsed. The generic price of the perp FRNs tumbled from par plus into the low 80s – which was a big crash back then. We were still trading the outstanding bonds 20 years later. During the 2008 bank crisis I was able to pick up bank paper priced in the low 30s, yielding double digits!

Back in the present… the sentries on the walls of our beleaguered desert fort are looking for the snipers hidden behind the dunes and in the palm trees. The harder they stare, the less likely they are to uncover anything.  Instead, maybe the Touaregs are planning an attack to come from the skies with their new Turkish drones, or they nicked one of Musk’s burrowing machines to come in under the wall? Maybe it will be to poisoned pandemic laced dates that very friendly Chinese bazar trader just delivered……..

A common factor in most market crashes is the authorities and regulators are alert to prevent the last crisis being repeated, but tend to be utterly blind to the reality the world is constantly changing and in flux. What went wrong last time may still go wrong this time, but probably because something completely new destabilised it.

So… what are my predicted “no-see-ems” that could trigger whatever happens next?

A reversal in the tech market? Yawn.. we all spotted that one… How about the market figures out a car company valued at a multiple of other automakers despite making zero profits selling cars, delivering a fraction of the number of its rivals, and facing massive rising competition in its market niche suddenly looks less secure when the latest carbon reduction research conclusively demonstrates lithium batteries are polluting, difficult to recycle and create a massive production carbon footprint compared to conventional cars?

A breakdown in politics as signs the Far Right are set to win in France. Apparently the most popular politician in la Belle France, with a 51% approval rating is Boris Johnson! Who would have thought. The prospect of Frexit – even though Martine le Pen says she wont – could shake the myth the new European Union Next Gen bonds are Speshul…

Or maybe it will be a dollar collapse as the gridlock in Washington deepens, trade wars escalate, Trump looks resurgent… etc etc… Add a dose of inflation and stagflation!

A collapse in US and UK house prices following the momentum bust that’s followed rosy expectations of V-Shaped pandemic recovery? Nothing breaks confidence as much as the feeling of sudden penury that a house crash generates!

Maybe it will be policy mistakes – a lose/lose scenario for central bankers. Dammed if they try to taper and normalise rates, and equally dammed if they don’t!

Of course, I’m just guessing now.. but why not.. Maybe it will be inflation… what I can say – with a high degree of certainty – is the sun will come up tomorrow… and probably the day after that….

I’d invite readers to add their own suggestions to the comment box!

Five things to read this morning

FT – Less liquidity, less fun

Torygraph – Streaming pushes British Music Exports to record high

FT – Carbon Trading will drive emission cuts in commodity supply chains

BBerg – Bond Market Has a $970 billion Sheriff in Town

WSJ – China Repackages Its History in Support of Xi’s National Vision

Out of time and back to the day job!

Bill Blain

Shard Capital

14 Comments

  1. Something tangible, grounded in reality, that exposes the illusion and false gods that markets have created. Much like a little bat did….
    A housing crash? When a car parking space in St Ives is selling for £45,000 ……In addition, do house prices match wage increases and salaries? Definitely not for me, and definitely not where i live.

  2. A celebrity tweeting that we should all live in mud huts?

    • That’s kind of everyday….
      But how about a celebrity saying “feck it.. I’m digging a coal mine to power my own power station to provide lots of energy cheap to third world nations to raise them out of poverty..” or even.. “I’m digging a coal mine to power a hydrogen plant to power recovery in Africa”
      You get the drift.. but it long term…

  3. I suspect Tether to go bust and a Crypto Collapse in Q3, that’ll spread to ARK and Tesla, SPACS. At the same time Mainstreet businesses to struggle a lot and cut spending and push up prices, which will lead to a contraction and inflation. CB will taper a little, then more, and Governments announcing Austerity and blaming Greek pensioners, and Republicans will blame democrats for their reckless spending. China says Taiwan belongs to them and Ukraine will be annexed to the Republic of Russia. Trump will be prosecuted for a mountain of evidence, so will Elon but he’ll escape in a rocket to Mars. Julian Assange will land safely in Sydney and Eddie Snowden will return to Washington, with low blood pressure. Or something like that, I don’t know…

  4. Steven McIlraith
    Steven McIlraith

    I’m still of a mind to keep an eye on China. News lately of Italy’s balking at a Belt for the Road, and some rumblings of discontent from Africa about the “deals” they entered into with the neo-imperialist could give Xi reason to play the Taiwan card. What would chip supply lines look like if there was some kind of blockade? Farfetched? I hope so, but you asked….ha!

  5. Fiscal stimulus will run its course. The economic recovery may run out of steam sooner than predicted, living post-pandemic valuations that are higher than before the pandemic but with persistently elevated unemployment, rock-bottom interest rates, continued inequality and very sluggish growth. The market comes around to the fact that there are no more monetary or fiscal cards left to play … then the crash.

  6. John Rutherford
    John Rutherford

    Climate change causes worldwide food shortages as we re-wild the UK. Crash starts when Avocado prices triple in Notting Hill.

  7. Power abhors a vacuum is staring us in the face especially after the G-7. President Jimmy Carter was a decent and honest man which to his credit after leaving the White House built houses for the homeless. But President Carter was not a good or great President for the USA or the world. President Joe Biden who came in 5th in the New Hampshire primary and had to drop out the first time he ran for plagiarizing a British Politician will do much worse since he is showing visible signs of dementia and his administration is terrified of letting him speak in public – just pick any video clips from the G-7 that are not scripted events.

    That is the issue. Fear takes over when bullies are around except for those who stand up to them. Putin is not the issue but Xi. The vaccine for the Trump presidency was the Wuhan Virus or in polite circles called COVID-19. Trump delivered the antidote but too late to save himself.

    Watch over the next 12 months since this will be a yawner of things happening. The US Congress doesn’t have the votes in the Senate to remove President Biden. He can only resign on his own but will not due to the ghost of Milhous. If he does it in less than 2 years then everyone knows it was a bait and switch. The Republicans will have the normal gains for being the minority so Biden will most likely be in office for 4 more years. 4 very painful years for the Democrats as he drags them down.

    Donald Trump is our Winston Churchill. Maybe a cad but at least he doesn’t back down and the bullies rightly fear him. There were no new wars when The Donald was President for a simple reason – there would be hell to pay for the other side.

    The world today is like the proverbial frog in the pot as the water temperature rises. The only escape is cold water – Donald Trump is the world’s cold water and will return.

    PS: The picture of The Monster from the Black Lagoon made me laugh since when young it was the first scary movie I saw. Maybe The Donald is the NexGen for you and others.

    • I am going to disagree with you. Donald Trump is no Winston Churchill. He is something else completely. I am highly concerned that Trump’s stranglehold on the GOP is very bad for America and the Western Economy – but if you read the porridge, you knew that!

  8. We go mad in crowds but come to our senses one by one. It will just take that first person to say “this is mad” and one by one the dominoes will start to fall. The spark could be any of the current crop of totally mad activities that are apparent if you take a look around or maybe something that is not on anyone’s radar. When it’s over everyone will say how could that have happened?

  9. Sebastian Murray-Roberts
    Sebastian Murray-Roberts

    How about people realizing that Tether is a fraud and this causes a dramatic collapse in the crypto market (since something like 60% of crypto transactions involve USDT). It usually takes some sort of unseen or ignored fraud coming to life that causes people to start looking carefully at everything around them and that’s when the proverbial tide starts going out and you get to see who’s been swimming naked as Buffet would say

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