Dismal Politics, Crashing Markets, Inflation and Exogenous Shocks.. Excellent.. get your buying boots ready!

As we start a new week of dismal markets, depressing political news, rising inflation and lots of what next worries… relax.. the Sun will come up tomorrow. Not so sure about the economy though…

Blain’s Morning Porridge – June 20 2022: Dismal Politics, Crashing Markets, Inflation and Exogenous Shocks.. Excellent.. get your buying boots ready!

“Watch out for the crocodiles..” “Oh, don’t worry about them (the sharks have eaten them all..)”

This morning – As we start a new week of dismal markets, depressing political news, rising inflation and lots of what next worries… relax.. the Sun will come up tomorrow. Not so sure about the economy though…

Let me start this morning by putting on my Charity Hat in support of UK service personnel. On Saturday 25th June I shall be racing in the world-famous Round The Island Yacht Race on behalf of Walking With The Wounded. It will be a day spent navigating my yacht, Batfish 5, around The Isle of Wight in Southern England in the company of some 1100 other boats.

I’ve put together a crew of colleagues from Shard Capital and experienced sailors for the day. While it should be great fun, the aim is to put a couple of thousand pounds in the pocket of the charity to support wounded members of the UK’s Armed Forces.

Please visit:  https://www.justgiving.com/fundraising/Bill-Blain1 if you care to support this deserving charity by making a donation.

Tomorrow is Mid-Summer, the Longest Day here in the Northern Hemisphere! The pessimist in my soul reminds me the nights will soon start drawing in again.. reminding us the chill of winter is only 6 months away. 2022 is shaping up to be a horrible year. If it can go wrong.. then it probably will in the next two quarters. Relax. If its going to happen .. it will. That’s the way markets work.

Last week was all about how much damage Central Banks can do to sentiment. As they stepped into to triage the gaping wounds inflicted by raging supply chain and energy shock inflation with the sticky plaster of fractional rate hikes, markets took a pasting. I’m not the only market watcher who reckons we’ve only about half-way through the price correction on global stocks – there is further pain to come.

The outlook for bonds is equally dismal with further rate hikes to come. Commodities, even oil, would take a pasting if they were not being supported by supply side shortages. In short.. 2022 is shaping up to be one of the worst years on record for traditional investment strategies in terms of crashing stock prices, rising bond yields and economic growth – even before you factor in the negative real costs of double digit inflation.

Around the world the big losers are going to be savers and pensioners – but you don’t see much about them in the papers. (Matters to me – every morning my creaking bones woke up to the reality I’m not in my twenties anymore. In fact my kids are only just still in their twenties.. worrying…)

As I look around the screens this morning, there is a growing sense things can only get worse – there always is in times of market crisis. Relax. Seen it before. It would seem Homo Financialiculus is a timid creature that’s evolved to always fearing the worst from markets, politics and instability, and seldom spots the multiple potential opportunities that can emerge.

(And before I start; do not ask me for views on Crypto. The crashes in cryptocurrencies last week are nothing to do with markets – they are simply the last act in the Game of Greater Fools. Whatever the “crypto-experts” say about “new opportunities”, “buying windows” or “new adoptions” – it’s all twaddle. They have zero utility and their only value is what anyone else thinks they might be. Let that be an end to it.)

The reality is hard markets are typically followed by more rewarding ones. The critical trick is to remain solvent through this crisis moment, protect capital and to be in a position to rebuild returns when stability returns – as it will. But for today… forget normal. Be protective. Worse may still be coming… It might be better than expected, but why risk it?

This week is shaping up to be an interesting one. There will be a host of new inflation clues and purchasing manager reports to tell us just how industry is slowing. We’ve got Fed-Head Jay Powell explaining to Washington why the US is likely to see relatively mild inflation and a short recession later this year/next.

Not so positive in Europe, where Macron and the Spanish government took a pasting at the polls and the coming recession is going to deep, divisive and will be spelt: STAGFLATION.

France… is going to be interesting. Macron now lacks a majority in the French parliament, and will likely be forced into an accommodation with the centre-right, which broadly attracts votes from Frenchmen least likely to agree to French workers paying for Italian pensions – which is what the ECB will be forced to propose as part of its “anti-fragmentation” of European bond spread measures later this year. Ah.. joy.. finally something the Germans and the French can agree on.

The prospects for French stability are not good – the far-left under Jean-Luc Melenchon got a significant 131 seats. A resurgent and largely right-wing Gillet-Jaune protest movement against higher prices could coalesce with stronger anti-capitalism rhetoric from the left. Marvellous.

None of which is positive for Ukraine – where the “staunch” support of Europe is critical to fight against Russia. Instead, the leftward shift in Europe is increasingly vulnerable to demands to reopen the doors to Russian energy supplies to reflate economies. It will likely force Ukraine to concede territory, giving Putin an optical win.

Still, the fact the French look revolting… will detract from the ongoing embarrassment that is Boris in the UK. Here in Blighty we’ve got full scale industrial meltdown as the main attraction; the curtain raiser being a rail-strike this week – which isn’t helpful when I’ve got to get up to London for the Euromoney Global Borrowers and Bond Investors Forum where I’ll be speaking about How capital markets have changed post pandemic. What a great topic – its not what to say, but what I won’t have time to pontificate about that will matter!  

The reality is the world has changed – and changed utterly.

One major problem is markets are constantly churning and a) participants with their heads buried in risk reports and the latest ESG regulations, aren’t focused on the very painful underlying economic realities of what’s actually happening in the real economy, and b) a very large swathe of the financial market have never actually experienced market crisis conditions.

I looked it up and discovered 61% of the 500,000 workers in the City of London are aged between 22 and 40. Meaning: well over half of finance professionals have only ever known markets dominated by cheap money, too-big-to-fail mentality and the expectation central banks exist to stabilise markets and boost sentiment. And those old enough to remember the past are all buried in the bureaucracy of modern markets..

Which I suppose is excellent news for me… I do remember.. Welcome to the new world.

Now we know how fragile the global economy is. We got the first hints when a single container ship blocked the Suez Canal and raised the issue of supply chains. Who knew? Every single purchasing manager knew – but who was listening to them on the board of corporates focused on boosting their stock prices by borrowing cheap money to spend on stock buybacks?

Now we know how vulnerable the global economy is to geopolitics. Who knew? We blithely ignored the political scientists warning about the dangers of painting Russia into a corner and pushing against Chinese growth – but populist politics in the West needed enemies to rail against, walls to build and someone-else-to-blame.

Now we’ve woken up. Politics has led us here. Inflation from the Energy, Food and Post Pandemic supply shocks will be long-term and anything but transitory – in Europe. Less so in the US, and another lucky break for Trump v2.1 who will be able to blame inflation on Biden and support US isolationism. More instability.

Hey-ho.. get used to it…

Finally, I’m going to take the second half of the week easy to I spend quality time with my daughter. She is planning Career No 2 after losing her digital marketing role in a fashion start-up on the on the back of crashing spending and soaring production costs. If anyone can use a feisty half-Scots, half-Irish girl with an opinion and ideas about absolutely everything… then can I send you her CV? She’s seen the consumer crisis up close and personal, and the financial precariousness of the rag-trade at first hand.. which is kind of fate as her mother also started her career in fashion before going on to greater things.

Five Things to Read This Morning

WSJ – Recession Probability Soars as Inflation Worsens

FT – The deafening silence over Brexit’s economic fallout

BBerg – UK Set for Recession and Pound Test of Historic Lows, Survey Finds

Torygraph – Roger Bootle: The Bank of England’s credibility is now severely compromised

FT – Hilary Clinton: “We are standing on the precipice of losing our democracy”

Out of time – back to the day job…

Bill Blain

Strategist – Shard Capital

9 Comments

  1. Spot on…. Excellent piece Bill!!
    (Although, I’m not so sure about buying boots…(maybe ‘Long UST buying boots’…!?!)

    • Close but not exactly correct. Ladder maturities in 13 and 26 week UST Bills. Soon do the same in the 52 week Bills.

  2. I am not so certain that the crypto crash has nothing to do with the market crash. I agree that they have no utility. They are very cumbersome to manage and expensive to transfer. However the market crash and the end of easy money was a catalyst to bring cryptos down. It would have happened sooner or later but it is happening now.

    I hope Europe figures itself out because with democracies flailing, it is easy for authoritarians to assert themselves in this world.

  3. Would it be possible to get a copy of your speech “How capital markets have changed post pandemic.” ? It sounds like a seminal work.

  4. Another very enjoyable and informative piece. You have little touch of Hunter Thompson’s “gonzo journalism” style, not sure if deliberated or not, but it makes your financial articles stand up from the crowd and certainly makes for pleasant reading. Thank you for your insight!

  5. Not sure about the claim that “populist politics in the West needed enemies to rail against”. Isn’t it the establishment parties and allegedly sane political titans who have been insistent on telling Russia that they are the enemy for the last decade or so?

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